Natural vs Market Price — The Wealth of Nations

Smith defines the natural price as what it takes to pay land, labor, and capital at normal rates in a place and time. The market price is what buyers actually pay. That depends on how much is for sale versus effectual demand, meaning demand from people who can and will pay the full price. A poor man's wish for a coach is not real demand if he cannot buy one.

When supply is short, buyers bid against each other and price rises above the natural rate. When too much is offered, unsold goods push sellers to cut price until some land, labor, or capital leaves that trade. Smith calls the natural price a center that market prices move toward. Grain swings more wildly than cloth because harvests change year to year.

Shortages and surpluses hit wages and profit first. Fixed money rents barely move. Public mourning can raise black cloth prices and tailor wages for different reasons. Monopolies and trade secrets can keep prices above natural levels for a long time. Prices rarely stay below natural price for long because producers withdraw until scarcity pulls them back up. Smith ends by pointing forward: what sets the natural rates of wages, profit, and rent?