The previous chapter examined the effects of a change in price on the behavior of a single firm; here we are interested in the effect on a group of firms. As the author points out, "For the most part, this effect can be got by aggregating the effects on single firms, as we found we could aggregate the effects on private individuals; so far the group must obey the same laws as the single firm." The complicating factor occurs when "the change in prices has the effect of altering the number of firms producing a particular commodity." Hicks calls this "a notoriously tricky matter" and proceeds by considering two cases: one in which the price change stimulates a new firm to begin production of a commodity X by using entrepreneurial resources that had not been used before, and a second in which such a firm takes entrepreneurial resources that previously had been used to make other products and transfers them to the production of X. In the first case the production creates a new source of supply of X and a new source of demand for the factors used to produce X. In the second case, the shift to production of X means that the supply of certain other products may diminish; similarly, the demand for factors used to produce those other products may also diminish. Hicks concludes that "in direction of change, though not perhaps in extent, the complications due to new firms are similar in character to those we have already covered."
Hicks argues that the only possible source of instability in the equilibrium of production is, as with exchange equilibrium, the presence of strong asymmetry in income effects. This would imply, for example, (using the language of Chapter V) that "the sellers of X will have to be much more anxious to consume more X when they become better off than the buyers of X are." In considering how likely it is for such an asymmetry to cause instability, Hicks notes that (as seen in the previous chapter) supply and demand from firms are not subject to income effects. Therefore he proceeds by separately considering four different markets:
(1) The markets for products. Here a fall in price makes consumers better off and entrepreneurs worse off; therefore income effects exist on both sides here. As with pure exchange, instability is only possible if the product in question is an inferior good, or if it is consumed to significant extent by the entrepreneurs. Even if these conditions exist, however, the market will only be unstable if these effects dominate the substitution effects. In the present case we have the substitution effects from consumers choosing between the given product and other commodities, and we also have the effect on production, which, as we saw in a previous section acts as a substitution effect. Both of these effects work toward stability.
(2) The markets for factors. Here a fall in price makes the suppliers of the factor worse off, while making the entrepreneurs who purchase the factor better off. Hicks argues that the specifics of this case are likely to cause an income effect that could tend toward instability; again, however, there are the stabilizing effects of both substitution by individual consumers (between leisure and consumption, for example) as well as the effect from production.
(3) The markets for direct services. Here there is no production, so these markets work exactly as described for exchange.
(4) Markets for intermediate products. In this case both the supply and demand come from firms, so there is no income effect; hence these markets are necessarily stable.
Summarizing all these considerations, Hicks concludes that the situation is similar to that of the equilibrium of exchange, but in the present situation the absence of income effects leads toward stability. Any danger of instability is concentrated in the markets for factors. The section closes by examining the question of how likely it is that an instability in the factor markets could cause instability in the system as a whole. His answer is as follows:
It would seem that it is not at all likely. For we must always remember that the predominant relation on the technical side between factors and products reckons as a relation of substitution, and that it is usually a strong relation. The possibility of considerable changes in the rate of conversion of factors into products as a result of quite small changes in relative prices is a strong stabilizing element. It is this more than anything else which gives us ground for supposing that the general equilibrium of production will be stable in most ordinary circumstances.
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