Daily Speculations

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"Finally we have a third situation. Mrs. Jones has now decided

that she wants a black dress with white applique alligators, and it

seems hopeless. Her demand function is up to $50 on this item, but

the supply functions are only zero. Then she hears from her operator

in the beauty parlor that there is a store where for a price they will

sell you anything. "It's run a little differently from that bargain

basement place, or the high fashion store that you went to a while

ago, but nevertheless if you want it, they've got it. It's up there on

Wall Street, and it's called the New York Stock Exchange." So she

goes up there on Wall Street and sure enough, there on the rack is a

black dress with white applique alligators. She is about to go and get

it, when she is stopped by a man in a sandwich board with the word

"broker" on it. He says, ''Just a minute, lady, we don't do business

that way here." She says, "You don't, well how do you do business?"

He said, "You write down on a piece of paper what you are willing

to pay for that dress, and then I'll go to the owner and find out what,

he's willing to sell it for, and if the two prices meet or overlap, then

I will decide what the price is which will be satisfactory to you both.

Mrs. Jones thinks about this a while. Then she does just what the

man in the sandwich board says and puts down $25. It turns out

that the owner was willing to sell it for $15, so the broker. being an

honest man, comes out and says: "Madam, you get it at a bargain

for $20,"and she goes away happy having saved $5, she thinks. The

owner is happy since he got five dollars more than he was willing to

take.

You will see that this is a third situation in which neither the

buyer nor the seller knew the other's demand or supply function,

hut with the aid of a go-between whom they trusted, a transaction

was effected. This situation, which held only for one unit would

hold for as many units as you like, nor does there have to he the

same number of units 011 either side. The prices need not be the

same, they might be different for each unit. You can simply plot up

the demand and supply functions in a discreet manner, a series of

steps going down and a series of steps going up, and if they overlap

then there is a transaction for an equal number of buyers and sellers

at a single price. The reliability of the intermediary, the broker, is

essential to this kind of a market. You can easily see that the nmi

in the sandwich hoard, had he been so minded, could have told the

owner of the dress that the bid was $15, and told Mrs. Jones she

would have to pay the full */$25 /*and pocketed the difference. No one

would have been the wiser if the final information is not available to

all parties. It is seen that those who have information that others

have not, are in the position of advantage, and it takes a degree of

faith on the part of the participants and a degree of honesty on the

part of the intermediary to assure what might be called fair play.

Now perhaps the man in the sandwich board took out a little piece

for himself, but maybe that's regulated.

If you will examine the details of the above picture by contrast

to what appears in elementary textbook, you will see that there

are indeed a great many similarities. The principal differences are

brought about as I mentioned by making the price the independent

rather than the dependent variable, by taking into account explicitly

the discreetness of both the domain and the range sets, and by

taking into account explicitly that the supply and demand were now

items rather than items per unit time. Demand and supply functions

change with each transaction. They are definitely functions of time.

With these modifications it is seen that there is quite noticeable
similarity,

but essential differences in detail, between the economists'

theoretical picture and the data of observation.