Value & Capital, CHAPTER VIII, Section 2

To examine the workings of an economic system with both private individuals and firms, this section starts from the points of view of the private individuals and of the individual entrepreneurs who run the firms.  Every individual is assumed to have resources of one or both of the following two types:  (1) factors of production, which can be bought and sold on the market, and (2) entrepreneurial resources, which cannot be traded, but which can be used, in combination with the various factors, to produce marketable products.  Just because individuals have these entrepreneurial resources, however, does not mean they will necessarily use them;  it must be the case that using them will generate a positive surplus, given the market prices for the factors and products.  If so, such an individual will become an entrepreneur and use his resources to maximize the surplus.  Doing so will determine the individual's demand for factors and supply of products.  The surplus thus generated is then available for the entrepreneur to use (along with his other income) for consumption as a private individual.

A private individual, who either does not possess entrepreneurial resources or does not find it worthwhile to use them, has to decide how much of his supply of each factor he will sell and how much of each commodity he will purchase.  Again, the system of prices determines these decisions.

Hicks summarizes the workings of this system as follows:

Taking entrepreneurs and private individuals together, the demands and supplies of all sorts of commodities are determined, once the system of prices is given.  Strictly speaking, we have to distinguish four kinds of markets:  (1) the markets for products, where demand comes from private accounts (of private individuals and entrepreneurs), supply comes from the business accounts of entrepreneurs (that is to say, from firms); (2) markets for factors, where demand comes from firms, supply from private accounts; (3) markets for direct services, where supply and demand both come from private accounts; (4) markets for intermediate products, which are products for one firm and factors for another, so that supply and demand both come from firms.  In all kinds of markets, however, supply and demand are determined, once the price-system is given.

Hicks closes the section by noting briefly that, as in the theory of exchange, we take one of the commodities as a standard, and, if the number of commodities is n, we have n - 1 equations to determine the prices of the other commodities in terms of the standard.