The Wealth of Nations
Book 1, Chapter 7
the Natural and Market Price of Commodities
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Chapter 7 Summary
In every society, there is an average rate for wages, profit, and rent, determined by the society's circumstances and the nature of each employment. These average rates are known as natural rates. If the price of a commodity equals the total costs of its production, it is then sold for what is known as its "natural price"—or the cost incurred to bring it to market.
The actual price at which a commodity is sold is known as its market price. This is determined by the quantity of the commodity brought to market and the demand for that commodity. Those purchasing the commodity could be referred to as the "effectual demanders," and their demand the "effectual demand," since this demand may be sufficient to effectuate the bringing of the commodity to market.
If the quantity of a commodity brought to market falls short of the effectual demand, those wishing to purchase that commodity will be willing to pay more, and consequently the market price will rise.
If the quantity of a commodity brought to market exceeds the effectual demand, it cannot all be sold to those willing to pay the whole value; a portion will need to be sold to those wishing to pay less. This lower price will reduce the price of the whole, and as such the market price will fall.
The natural price of a commodity is the base price to which prices continually gravitate; despite the factors affecting them, prices will constantly return and align with the natural price.
The same number of agricultural workers may produce different quantities of a commodity each year. Only an average produce by an industry can be suited to effectual demand. Manufacturing secrets are often better kept than trade secrets. When an individual or trading company has a monopoly over the supply of a commodity, this is as effective as having a manufacturing or trade secret. This will generally raise the market price of a particular commodity above its natural price.
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