Marginal cost

“ The price, then, of a commodity tends roughly to equal its marginal cost of production; and this marginal cost (in perfect symmetry with what we observed as regards marginal utility) , may be conceived as applying either to the marginal producer or to the marginal output of any producer. In the former aspect it is open to a misinterpretation, against which it will be well to guard. ”

“ The object is to secure that nowhere does expenditure fail to yield a commensurate return. This we express, when we consider a business in its aspect as a consumer, by saying that its consumption of anything will not be carried beyond the point at which the marginal utility exceeds the price it will have to pay. When we consider it as a producer, we say that its production of anything will not be carried beyond the point at which the marginal cost exceeds the price it will obtain. ”

“ The marginal cost of producing twenty-three and twenty-two hundredths grains of gold will always be a dollar, however the dollar may vary in value. Indeed, in general, the assumption of a constant value of the money-unit is implied in the monetary cost concept. Cost curves are supply-curves and the reasoning already given as to the need for assuming constant value for money in the supply and demand concept will apply here. Costs function in value-determination only [Pg 70] by checking supply. Rising costs tend to mean a lessened supply. ”

“ The first three of these items bear directly upon the determination of the representative or marginal producers for price-fixing purposes. The fundamental question in fixing prices that are based on cost, is the determination of what may be called the “marginal cost.” This cost may be explained as follows: it is frequently the case that when the several individual costs for a group of producers are accurately ascertained and are ranged in their order from low to high, there will be a variation among them of 100%, the high cost being double that of the low cost. ”

“ Hence the business man's view of the costs is that they determine value. It is true in the sense that the supply of a particular product in any market is at last limited by cost of marginal producers or of marginal portions of supply. But it is not true of all the units of product that costs determine, or equal, market price. There is a margin above costs to the successful enterpriser on a large portion of his output. ”

“ But while, as this illustration indicates, the phenomenon of surplus profits becomes of very great importance when we seek to study the distribution of wealth, it need not detain us here. For the surplus element arises only in so far as the costs of a business are lower than the marginal costs; and it is the marginal costs, which, with good reason, we are now endeavoring to analyze. The marginal costs must include a normal profit, i.e. a profit which will cover earnings of management, the reward of risk and enterprise, interest on capital, but nothing further. ”

“ The entrepreneur must, therefore, expect, when he buys or constructs his equipment, to cover his supplementary cost, his risk cost and his interest cost out of the excess of the marginal value of the prime cost over its average value; so that in long-period equilibrium the excess of the marginal prime cost over the average prime cost is equal to the sum of the supplementary, risk and interest costs. ”

“ I shall show that the quantity theory conflicts with most of our doctrines of prices, as worked out in our systems of economics. I shall show that, in important cases, the quantity theory conflicts with the law of supply and demand, with the doctrine of cost of production, with the capitalization theory, and with the doctrine of imputation as worked out by the Austrians, whereby the prices of labor, land, and other agents of production rise or fall with the prices of the consumption goods which they produce. ”

“ If the portion of produce raised in the most unfavourable circumstances, obtains a value proportioned to its cost of production; all the portions raised in more favourable circumstances, selling as they must do at the same value, obtain a value more than proportioned to their cost of production. Their value is not, correctly speaking, a scarcity value, for it is determined by the circumstances of the production of the commodity, and not by the degree of dearness necessary for keeping down the demand to the level of a limited supply. ”

“ It belongs to the man who labours, or produces an article, estimating for himself, as we have seen, the amount of burden he has assumed, to fix the price measured by that burden or cost. He alone knows it, and he alone, therefore, can determine it. It belongs, on the other hand, to the purchaser to estimate for himself the value of the labour or commodity to him. He alone can do so in fact, for he alone knows the nature of his own wants. By the settlement of the first point—the cost to the producer—the price becomes a fixed sum. ”

“ If the labourer obtains more abundant commodities, only by reason of their greater cheapness; if he obtains a greater quantity, but not on the whole a greater cost; real wages will be increased, but not money wages, and there will be nothing to affect the rate of profit. But if he obtains a greater quantity of commodities of which the cost of production is not lowered, he obtains a greater cost; his money wages are higher. The expense of these increased money wages falls wholly on the capitalist. ”

“ Value runs from finished product to agents of production, labor, and instrumental goods, and land. Avoiding needless complications from a discussion of interest as a factor in cost—a doctrine on which the Austrians, say Wieser and Böhm-Bawerk, are not agreed,—it is enough to point out that high wages or high rents, which limit production in any given industry or establishment, are high because the land and labor in question have alternative uses, because other industries, or other [Pg 71] competitors in the same industry, bid for them. Cost-curves, then, are reflections of demand-curves. ”

“ Low prices, according to all standard writers on political economy, are the direct results of a contracting currency, and a consequent increasing scarcity of money, and the cost of production is not only greatly increased by inability of the producer to obtain money except at high rates of interest, but the terms upon which money can be had at all are often so exacting as to discourage permanent improvement. ”

“ But the problems would have been easier to handle, if the public generally were a little less disposed to think in terms of averages, and a little more in terms of margins, if we all of us instinctively realized that the cost that really matters is the cost at which additional production is profitable under the conditions ruling at the time, or in the immediate future. ”

“ On the other hand, if any production cannot be largely extended so that the supply in market barely meets the requirements of purchasers, the tendency of normal values is toward the cost of the most costly part of the product required to meet wants. ”

“ It must be remembered too that general high prices, even supposing them to exist, can be of no use to a producer or dealer, considered as such; for if they increase his money returns, they increase in the same degree all his expenses. There is no mode in which capitalists can compensate themselves for a high cost of labour, through any action on values or prices. ”

“ But if the cost-curve is rising because of a fall in the value of money, then the demand-curve will be rising also, and production will not be checked. The general law as to the relation of cost to demand and supply assumes a fixed value of the unit of cost, the dollar.
To the Austrian economists we owe a rational theory of costs which gives the money-outlay concept more than a merely empirical basis. First, they see in costs not causes, but results. Value causation comes ultimately, not from the side of supply, but from the side of demand. ”

“ In this very dynamic aspect of modern life, one observes a tremendous increase in demand for the costly and enervating indulgencies of conspicuous expenditure and a more than proportionate decrease in the productive powers which contribute to the synchronous supply of the staples of life. Here, indeed, resides a fundamental problem in national cost accounting. ”

“ To bring this equilibrium into the general scheme of the modern theory of costs, however, in terms precise enough to make a satisfactory theory of the value of money, is a thing which has not so far been done, and I do not have high hopes of its early accomplishment. In any case, such a theory must rest upon a positive theory of value. Cost doctrine is negative, and can never be fundamental. ”

“ If we are speaking not of the value of money, but of its cost, (that is, the quantity of the country's labour which must be expended to obtain it,) we must add to these four conditions of cheapness a fifth condition, namely, "whose productive industry is the most efficient." This last, however, does not at all affect the value of money, estimated in commodities: it affects the general abundance and facility with which all things, money and commodities together, can be obtained. ”

“ Thus we see exchange value and price following the law of margins like value in use, with this qualification, that they are determined directly, not by marginal utility but by marginal equivalence, in which, not only supply and demand, but also the wealth of the purchasers is taken into account. Rare articles of luxury, e.g., precious stones, fetch very high prices, because the rich contend for them with the poor and the richest with the rich. Stock goods supplied for imperative needs command very low prices, corresponding to the purchasing power of the lowest strata of the population. ”