Nassau Senior Supply and Demand

Nassau Senior, Competition, Supply and Demand, Price

Nassau Senior was another who supported the classical ideas of competition, supply and demand, and price. But just as Say had unconsciously emphasized the demand-utility aspects of price, Senior emphasized the supply-cost of production side. Some authors have read this emphasis in Ricardo's writing, but Senior did not leave his principles to a confused interpretation. The limitation of supply, he said, was by far the most important con­sideration in the determination of price. Whereas Ricardo con­stantly referred to labor as the sole source of value, allowing little or nothing for the contribution of natural resources and capital, Senior rearranged these factors. He believed that supply was affected by the three elements of production, labor, abstinence (which is Senior's term for capital), and the forces of nature. The supply of any commodity was "limited by the difficulty of finding persons ready to submit to the labour and abstinence necessary" to its production. Hence the cost of production limited supply. When the supply of raw materials was accessible to all— that is, where free competition existed—prices would tend to equal the cost of production. Senior was aware that the forces of supply and demand could not cause an instantaneous adjustment of price; but gradually, barring some interference, the net effect of supply and demand would be to equalize price and cost of production.

A bit more realism entered the writings of Senior than-that of his predecessors, for he acknowledged the presence of monopoly and attempted to show how it influenced price. The first class of monopolists, explained Senior, were those who had control of the use of some special facility in production but not of production itself. Hence, the producer in this case could expand but could not limit the supply. Nor could he set the price above the cost of production of his competitors who were producing without the use of the special facility which he possessed. The tendency of such a producer would be to set the prices below that of his com­petitors but above his own cost, and to expect thereby to increase his own sales. Except for the fact that exclusive rights to the new device might be guaranteed to the producer by patent, the condi­tions of free competition and the laws of supply and demand were not set aside in this instance. Indeed, the interests-of the producer and of the consumer were identical.

Senior noted another type of monopoly. In this case although the monopolist was in complete control of supply, increase in supply was impossible. The lower limit of price would be set by the cost of production and while the monopolist might set his price at any point he desired, he had to recognize that the laws of supply and demand would ultimately determine the amount of sales and the market price. A third form of monopoly existed in which the monopolist had complete control of the supply and he had power to increase or decrease it at will. On the whole, in spite of the absence of an upper limit to the price the monopolist could charge, the tendency would be to increase production, and expand sales at a lower price.

Then a fourth and final situation appeared in which the mo­nopolist while not the only producer had peculiar facilities for production which tended to disappear with increased production. Thus the producer, as long as he produced small quantities, could set his price just below that of his most efficient competitor; but if he expanded production, the peculiar circumstances which enabled him to produce a small quantity cheaply would not ap­ply and his cost of production would mount. A piece of extremely fertile land, for example, would produce a' certain quantity of grain with a minimum of labor and fertilizer, but productivity of the soil would decrease with each additional application of labor and fertilizer. Price under such circumstances, said Senior, would be set at the cost of that unit whose production was most expensive. The work of Senior, therefore, stands as a realistic application of the principles of Smith and Ricardo, especially the latter. The emphasis is upon supply and the factors which influence it. While demand is recognized as the counter force to supply, Senior makes no attempt to analyze it.