Note 45 — Chapter II

I am here abstracting from an important factor, namely, that not all prices are affected equally by changes in the value of money. Some prices are fixed by law and custom, and some incomes are tied by long time contracts. Thus, it will happen, in many cases, that supply and demand for a given good will be unequally affected by a change in the value of money. This means that certain values are tied to the value of money, rising and falling with it, so that the amount of power which some elements in the economic situation are able to exert through supply-price-offer and demand-price-offer are at the mercy of changes in the value of money. But this is an element which is incalculable, on the basis of the supply and demand concepts, and must be abstracted from if we are to make any definite assertions as to the effect of increase or decrease of demand in the active sense on supply in the passive sense, or vice versa. Unless we make this abstraction, and unless we assume a fixed value of money, we might find increase of demand in the active sense (nominal) leading sometimes to an increase, and sometimes to a decrease of supply in the passive sense, or rather, being accompanied by either increase or decrease of supply in the passive sense. No law would be possible. In practice, both of these abstractions are more or less consciously assumed.