CHAPTER  III

SUPPLY  AND  ITS  RELATION  TO  DEMAND
It  has  become  a  commonplace  to  say  that  the
price  of  things  is  settled  by  demand  and
supply.  The  statement,  though  true,  gives
little  information  so  long  as  the  meanings  of
demand  and  supply  remain  unexplained.
Demand  has  already  been  dissected.  We  have
discerned  that  it  expresses  the  relation  between
prices  and  quantities  bought,  declaring  that
so  much  will  be  bought  at  one  price  and  so
much  at  another  price,  and  that  it  is  derived
from  the  marginal  utilities  of  things  to  consumers. ­
  We  have  now  to  interpret  supply.
It  too  expresses  a  relation  and  declares  that
at  one  price  one  quantity  will  be  produced
and  at  another  price  another  quantity.
This  statement  must  be  expanded.
Let  us  think  of  an  industry  as  constituted
of  half  a  dozen  businesses  or  firms.  Each  of
these  producing  units  has  its  own  cost  of  production ­
  (meaning  cost  of  production  per  unit
of  output),  and  it  is  exceedingly  unlikely  that
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