it may be, in fact, for the duration of the selected time period.5 The incompleteness of this kind of “equilibrium” is indicated by referring to it as short-run equilibrium—it being understood, of course, that the nature of the problem under consideration will dictate the “shortness” of the selected period, and also that a number of different such periods may be possible with corresponding equilibrium positions of different degrees of incompleteness.
2. The theorist may mark off, secondly, certain kinds of activity on the part of market participants that he believes to be more likely affected by the initial change in market data. He may believe, for example, that the discovery of a new oil field is likely to cause a more marked alteration in the willingness of oil producers to sell oil at given prices, than in the willingness of landlords to purchase new oil burners. The theorist might then confine his attention to the market activities of those buying and selling oil. When the decisions governing these activities are mutually compatible, then “the oil market” may be described as in equilibrium. The incompleteness of this kind of “equilibrium” is indicated by referring to it as partial equilibrium; that is, an equilibrium existing only in one selected “pocket” of the entire market system.6 The possibility, discussed in earlier sections of this chapter, of distinguishing separate “markets” between which definite interrelationships exist, arises, of course, out of the kind of analysis described here. The term “general equilibrium” is reserved for the condition where all adjustments have been carried through to completion, so that no decisions made in the entire system, however remote from the initial change, are found to be disappointed.7
THE PATTERN OF MARKET ADJUSTMENT
We have seen that a market system may be divided by the theorist into more or less distinct areas of activity where market forces bring about adjustments with especial speed and directness. In considering the particular course of economic forces within such a distinct area of activity, the area is referred to as a “market”—in the same way as the economy as a whole is called a market (when we are interested in the ripples of economic forces as felt throughout the system). The simplest form of market where the forces set up by human action can be analyzed is that marked out by considering only the activities of those buying and selling the same good or service.
We speak—and will be doing so frequently in this book—of a market for shoes, wheat, a particular kind of labor, and so on. We bear in mind at all times that any equilibrium achieved in such a market may be quite incomplete from the standpoint of the entire market system. It is the especial directness with which changes in the data in one part of such a market make their impact on actions through this market that justifies our undertaking this kind of separate analysis.
In the actions taking place in the market for any one commodity, such as wheat, there is always, we find, the same market process at work. In any such market there is a general tendency on the part of potential buyers and sellers to continually revise their bids and offers, until all bids and offers are successfully accepted in the market. This general tendency expresses itself in three specific ways. First, so long as there is a discrepancy in the prices offered by different would-be buyers, or in the prices asked by different would-be sellers, there will be disappointments and subsequent revisions in bids or offers.8 Second, so long as the quantity of the commodity offered for sale at any one price (or below it) exceeds the quantity that prospective buyers are prepared to buy at this price (or above it), some of the would-be sellers will be disappointed and will be induced to revise their offers. Third, so long as the quantity of the commodity offered for sale at any one price (or below it) falls short of the quantity that prospective buyers are prepared to buy at this price (or above it), some of the would-be buyers will be disappointed and will be induced to revise their bids.
Thus, the agitation of the market proceeds under the impulse of very definite market forces. Prices offered and bid would be continually changing—even with constancy assumed in the basic production and consumption attitudes of the market participants—as would-be buyers or sellers find themselves forced to offer more attractive terms to the market. A would-be buyer might offer a higher price than before because his previous offer did not fit in with the plans of any prospective seller. Apparently all sellers aware of this previous offer found more attractive alternative ways of disposing of their commodities. A seller would be forced to lower his price because buyers found more attractive uses for their money—either elsewhere in this market, or in some other market altogether.
The general direction toward which agitation in the market is tending should be clear. If unlimited time were allowed for a market to reach its own equilibrium position—that is, if we assumed no change to occur indefinitely either in consumer valuation of the commodity or in producers’ assessment of the difficulty of its production—it is easy to imagine what would finally emerge. There would be a single price prevailing in the market; all sales would be effected at this price. Individuals would offer to sell the commodity at this price, and the quantity that they offer for sale would be exactly sufficient to satisfy those other individuals who are offering to buy the commodity at the prevailing price. No would-be buyer is disappointed in his plans to buy, and no would-be seller in his plans to sell.9
Much of our discussion thus far has concerned the attitudes of individuals at a given point in time, or over a period during which these attitudes are assumed not to change. The analysis of the market under these artificial conditions makes it possible, in addition, to grasp the course of the market process as it would operate in the absence of these restrictive assumptions. Let us consider again the pattern of adjustment discussed in the previous section.
If we permit change to occur in the urgency with which prospective buyers are anxious to acquire the commodity sold in the market, or if we permit change to occur in the conditions governing the production and supply of the commodity to the market, a number of new elements enter into the situation. It is clear, first of all, that with respect to the attitudes of buyers and sellers toward the commodity as of each moment, a different equilibrium situation occurs toward which the market would tend if the attitudes of that moment were maintained indefinitely. Since attitudes are permitted to change, it follows that the market process, the ceaseless agitation of the market, is being continually pulled toward a different equilibrium position. Would-be buyers and sellers who were disappointed in their past market activity—or who, even if not disappointed in the past, do not wish to be disappointed in the future—must revise their bids or offers to make them more attractive to the current market. A quite different importance is now attached to the skill of anticipating future market conditions. Disappointment of plans made by would-be sellers will spur them to undertake production only by their assessment of future demand conditions.
But the basic pattern of market adjustment is applicable in this changing market as well. The disappointments engendered at any one time by the existing absence of equilibrium will help to guide subsequent plans to anticipate the correct future conditions. Since the changes in market data can be expected to proceed only gradually, the success or failure of past plans can provide a fairly reliable indicator of how these plans must be revised in the future. Thus, market forces are still able to direct the agitation of the market in the direction of a uniform market price, and of a correspondence between the quantities offered and demanded in the market at given prices.
Where a considerable change in the basic market attitudes has occurred with abruptness, the consequences are not difficult to understand. The change will make itself felt initially by severely disappointing the plans of buyers and sellers who had been unable to foresee the change. If, for example, the supply of the commodity has been abruptly
