Much of this chapter is devoted to supply and demand, and establishing its proper place in setting the price of commodities. To do this, he creates the concept of “natural price.” Page 79: “There is in every society or neighborhood an ordinary or average rate both of wages and profit in every different employment of labor and stock..the ordinary or average rates may be called the natural rates of wages, profit, and rent, at the time and place in which they commonly prevail.”
Page 79: “The actual price at which any commodity is commonly sold is called its market price. It may either be above, below, or exactly the same with its natural price.”
Supply and demand determines the way in which the market price fluctuates around the natural price. From his remarks earlier concerning labor as the measurement of value, we can determine that, for Smith, the amount of labor embodied in a commodity determines it’s natural price, around which its market price fluctuates.
He then goes on to describe effectual demand as distinct from absolute demand. P 80: “A very poor man may be said in some sense to have a demand for a coach and six; he might like to have it; but his demand is not an effectual demand, so the commodity can never be brought to market in order to satisfy it.”
Page 82: “The natural price, therefore, is, as it were, the central price to which the prices of all commodities are continually gravitating.
He speaks later of the desire for secrecy on the part of those who benefit from a given commodity rising above it’s natural price, in order to prevent others from entering the market, which will naturally tend to lower the price by increasing the supply.
Later he touches briefly on monopoly. Page 87: “The price of monopoly is upon every occasion the highest which can be got. The natural price, or the price of free competition, on the contrary, is the lowest which can be taken, not upon every occasion indeed, but for any considerable time together.”
I run into a problem on page 89: “Though pecuniary wages and profit are very different in the different employments of labor and stock, yet a certain proportion seems commonly to take place between both the pecuniary wages in all the different employments of labor, and the pecuniary profits in all different employments of stock.” I’m not quite sure what he’s saying here, unless he is asserting that wages in a given industry that are 10% higher than the regional average ten to be associated with manufacture with a return on investment that is 10% higher than the regional average.