§17. Relation to Supply and Demand

Some students familiar with demand and supply curves as applied to the loan market may feel that they can get Edition: current; Page: [261] their bearings better if the exact relation is shown between these and the "map" here used. Therefore, it seems worth while here to bridge the gap between these two sorts of representations just as, at the outset, the gap was bridged between the map and pictures of the income stream earlier in this book. We may readily and completely derive the curves of demand and supply from the map and the constructions which have been drawn on it.

The individual demand curve of Individual 1 is found as follows: Rotate the straight line PQ about P as a pivot, that is, draw a series of PQ's from P at varying slopes. On each such PQ find Q, the point of tangency with a W line. The horizontal displacement of Q to the right of P is the loan which Individual 1 is willing to take at the rate of interest represented by the slope of PQ.

Thus we have both coordinates (namely, interest rate and amount of loans demanded at that rate) given by the map. Having these coordinates, we merely need to plot them on a separate sheet in the usual way.

In the same way we may construct every other individual's demand curve. The aggregate curve of all individuals (by adding all demands at a given interest rate) gives the total demand curve in the market.

The supply curves are constructed similarly; the only difference being that for supply we use the horizontal displacement of Q to the left of P, instead of to the right.

Of course, at any given slope near the slope of the market rate, some individuals will have a right, and others a left, displacement, and at the market rate itself the two displacements are equal in the aggregate. This is true where the supply and demand curves intersect.

Evidently the map gives us the same relationships as Edition: current; Page: [262] the ordinary supply and demand curves and much more. The supply and demand curves, for instance, give us only the displacements, or differences in income position, as between P and Q, while the map gives the whole income position of both points. And while we can reconstruct, as above, the demand and supply curve from our map, we cannot reconstruct our map from the supply and demand curves.

It may also be noted here that the supply curve is derived from the map in spite of the absence, in this first approximation, of any investment opportunity or productivity element. The significance of this fact will be more apparent in Chapter XI where under the second approximation this element is introduced.

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