Value & Capital, CHAPTER IX, Section 3

In this section the author, Sir John Hicks, describes his approach to analyzing the dynamic problem as being similar to the approach of Alfred Marshall (as opposed to the Austrian approach that relies on the stationary state model).  One difference between Hick's approach and Marshall's is that Marshall only analyzed the determination of value for a single commodity, whereas Hicks is "concerned with the determination of the whole system of values."

Marshall's analysis considers a supply of goods being brought forward for sale on a particular day (which Hicks calls Day I).  This supply is considered to be completely determined by past expectations (which may or may not match the actual supply and demand conditions that exist on Day I).  The demands, on the other hand, "will be determined by the preferences and income conditions that actually exist on Day I; they may also be affected by the expectations which exist on Day I, particularly if the commodity is durable, and some persons expect an increased demand (or diminished supply) in the future."

Hicks then explores the extent to which the price that results on Day I is "determinate," i.e. conclusively determined.  Hicks notes that Marshall uses "an ingenious argument" to show that the price is determinate -- namely that "in the end, supply and demand must be equated." At the price that results, buyers buy the quantity they want to buy at that price, and sellers sell the quantity they want to sell at that price.  Hicks states in a footnote that he will return to this point in a note at the conclusion of this chapter.

Hicks next explores what happens to the supply of goods on some "Day II, or perhaps some 'days' later."  There will begin to be effects from the price that results on Day I, in addition to the continuing influence of decisions made before Day I.  The Day I price will have different effects in the long run than in the short run.  In the short run the supplies of machinery, specialized skills, and other capital, along with "the appropriate industrial organization" have not had sufficient time to adapt to demand; instead, producers must make the best adjustments to demand that they can.  In the long run, these investments in productive capacity "have time to be adjusted to the incomes which are expected to be earned by them."  Given the price on Day I, producers may begin to plan for increasing output, and may make short-term or long-term plans in this direction.

The section concludes by explaining that, for given Day I and Day N, one could "inquire what output producers will plan to produce on Day N, if they expect the price on Day N to be such and such."  The different pairs of expected price and expected output will form a curve.  "Such a curve could be drawn up for each particular future date;  Marshall's short and long period curves are samples taken out of this potentially large collection."