The New Palgrave Dictionary of Economics

2018 Edition
| Editors: Macmillan Publishers Ltd

Offer

  • John Eatwell
Reference work entry
DOI: https://doi.org/10.1057/978-1-349-95189-5_1282

Abstract

The term ‘offer’ has typically been used to refer to offers for sale from given stocks. The flow of commodities from a production process is typically labelled ‘supply’. The distinction is not purely semantic, but bears upon differences in price determination – as between the attainment of equilibrium in the market for a stock, and the balance of supply and demand in production.

The term ‘offer’ has typically been used to refer to offers for sale from given stocks. The flow of commodities from a production process is typically labelled ‘supply’. The distinction is not purely semantic, but bears upon differences in price determination – as between the attainment of equilibrium in the market for a stock, and the balance of supply and demand in production.

Pedagogical exposition of neoclassical theory often proceeds from the analysis of pure exchange, to the analysis of exchange and production by means of ‘original’, non-producible factor services, to exchange and production which includes original factors and producible means of production. Such, for example, is the structure of Walras’s Elements of Pure Economics and volume 1 of Wicksell’s Lectures on Political Economy. The rationale for this procedure is that the essence of the theory – the resolution of individual attempts in a competitive economy to maximise utility subject to constraints – is most easily developed in the context of pure exchange, in which the constraints consist only of the stocks of commodities to be exchanged, and then the same principles may be extended to more complex scenarios.

Yet the transposition of the analysis from pure exchange to production involves the incorporation of two rather different modes of price formation within the model. The rentals paid for the factor services will be determined, as in pure exchange, by the balance of offer and demand. The prices of produced commodities will be equal to their costs of production.

Since, in equilibrium, the prices of produced commodities are equal to the sum of the rentals paid for the factor services used in their production, and the demand for those factor services is derived from the demand for products, the essential relation between utility maximization and the constraint of endowment, so evident in the case of pure exchange, is replicated in production as an indirect relation between utility maximization and fixed endowments of factors services. Or, to put it another way, as a relation between offers of factor services and the demands for them as mediated through demands for and supplies of products.

Production may therefore be considered a process of indirect exchange, in which offers of factor services are exchanged for one another, embodied in the form of produced commodities. This is the rationale behind Walras’s argument (1874–77, p. 143) that:

The exchange of two commodities for each other in a perfectly competitive market is an operation by which all holders of either one, or of both, of the two commodities can obtain the greatest possible satisfaction of their wants … . The main object of the theory of production of social wealth is to show how the principle of organization of agriculture, industry and commerce can be deduced as a logical consequence of [this] proposition.

The primacy of the balance of offer and demand within the logic of the theory also underpins Wicksteed’s famous assertion (1914) that the supply curve does not exist. What are drawn as supply curves are simply the reverse of the individuals’ demand to retain (not to offer) their original endowments. So the balance of offer and demand in exchange may be equally well represented as a balance of the sum of market demand and ‘own-demand’ with the fixed quantity of given endowment. And the balance of supply and demand in the market for products may be represented as a relation between the sum of market (derived) demands and own-demands for factor services and the fixed stocks of those services.

See Also

Bibliography

  1. Walras, L. 1874–7. Eléments d’économie politique pure. Trans. as Elements of Pure Economics, ed. W. Jaffé. Homewood: Irwin, 1954.Google Scholar
  2. Wicksell, K. 1901. Lectures on political economy, vol. 1, ed. L. Robbins. London: Routledge & Kegan Paul, 1931.Google Scholar
  3. Wicksteed, P.H. 1914. The scope and method of political economy. Economic Journal 24: 1–23.CrossRefGoogle Scholar

Copyright information

© Macmillan Publishers Ltd. 2018

Authors and Affiliations

  • John Eatwell
    • 1
  1. 1.