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Central power stations have dealt with overhead costs by making power rates lower during the off-peak hours of the day. Cut rates during the dull hours of the days are calculated to stimulate more nearly full time use of power, and to reduce the overhead burden per unit of power supplied. Night rates on telegraph and telephone service are intended to stimulate use of equipment during dull hours of the day. In anthracite coal production, advertising and education of consumers led to a reduction in seasonal buying. The increased steadiness of purchasing resulted in more constant production, and a lightening of the unit overhead cost. The idleness which occurs during the depression stage of a business cycle is a serious problem in overhead costs. If a factory is closed down for several months, the overhead costs continue and must be met. Cyclical idleness has tended to inspire manufacturers to make. up for their losses during idleness by scoops at high prices during prosperity.

It is commonly found that a plant will do better to produce at a partial loss than not to produce at all. Manufacturers for export follow the trade practice known as "dumping," with a view to selling product at less than cost prices in order to dispose of it without glutting the market at home. The exported product may command a price too low to cover the total cost, but the manufacturer finds that it is better to make a part of his overhead cost than to make none of it at all.

In the long run, price must be sufficient to cover both operating and overhead costs to marginal concerns. If price is inadequate for this. purpose, the old marginal concerns will be forced out of business, and the new concerns at the margin will be more efficient and less expensive producers. In the short run, however, price may be so low as barely to cover operating expenses. For temporary periods, business concerns will find it advantageous to operate at prices inadequate to cover all overhead costs. Of course, this partial loss is better than a total loss, but even the partial loss cannot continue indefinitely without wrecking the business.2

Normal Cost and Normal Price.-The word "normal" must be given a particular and strict definition. It is not synonymous with the word "average." It does not signify inevitable natural law. It does signify a tendency. It indicates a direction in which value forces. may be expected to move.

2 J. M. Clark, in The Economics of Overhead Costs, urges a policy of control of demand and supply in the business cycle by manipulation of the ratio between price and variable cost. His policy is described as follows, "If everybody stood ready to cut down to the absolute minimum of 'variable cost,' and if everybody shared such cuts as were made, nobody would have to cut that low or anything near it, in order to restore demand to a reasonable normal level. For the chief cause of falling-off in demand lies in the fact that any unemployment reduces people's purchasing power and so returns on itself in a vicious circle creating more unemployment. If every one were determined to sacrifice earnings whenever necessary to maintain output, this vicious circle could be broken and the chief cause of shrinkage of demand would disappear. If every one stood ready to cut prices to the limit to prevent unemployment, no one would have to cut very far." p. 29.

Such a tendency or expectation rests upon certain assumed conditions. Chiefly, these conditions are free and perfect competition, and a long run period of time. Normal price is the price which will tend to prevail under free competition and in the long run.

The force of these assumed conditions is significant chiefly because of their effect upon costs of production. Normal costs tend to establish themselves in competitive industry. Normal costs are substantially equal costs. This tendency arises from the desire of every producer to plunge into business at the point where he can hope to make the most gain. Such point will be found wherever, in a given branch of industry, one producer can put goods on the market at a lower cost than some one else. The low-cost producer sells at the same price as his rival with higher costs but makes a large profit simply because his costs are low. Wherever costs are unusually low, new producers enter the field. Their output floods the market and drives out of business those producers who require high prices to cover their exorbitant costs. The high-cost concern is constantly being killed off, and all concerns are tending to a point of common cost and common advantage. Competition tends to wipe out any differences or advantages which appear in any quarter. The tendency to the equalization of costs is slow. It works out only in the long run. Likewise it depends upon competition. The less perfect the competition, the less complete the working out of the tendency.

This tendency has led certain economists to introduce the concept of representative costs and the representative concern. The representative firm may be defined as that firm which is of most economical size, which has average advantages of location, and which is managed with average ability. The bulk of the firms in any branch of industry will concentrate in this representative group. Their costs will be normal for the rank and file of the industry. Year in and year out, their level of costs will be the prevailing level among the majority of firms. In the long run, others may come and others may go, but these run on indefinitely. The tendency toward equalization of costs brings about this core of the industry, this major group, which have normal, representative, long run costs of production.

The long run is sharply contrasted with the short run in this view of normal costs. In the short run, supply is limited by the amount of factories, mines, machines, and other equipment available in a given line of industry. If a sudden increase in demand is felt, the present factory equipment is inadequate. But to build new equipment takes time. To gather in savings and to find people willing to invest capital in additional factories takes time. Consequently, the supply of productive equipment is fixed over short periods of time. An increased demand would encounter a shortage of capital wherewith to make finished goods. Hence, it would bring on a shortage of finished goods themselves for the time being. But only for the time being. As soon. as capital equipment could be installed, output would expand, supply

of finished goods would increase, and the new demand would be satisfied with the new supply. Long run supply would meet demand at a normal or representative cost basis. The supply of productive equipment is highly mobile and variable over long periods of time.

The fundamental factor in long run supply is not consumers' goods, but the productive capacity to turn out those goods. The supply of equipment wherewith to make goods in the long run determines the supply of goods offered on the market. On the supply side, our long run factor is clearly the supply of the means of production.

Normal price is that price which in the long run and under free competition approximates the cost of production to representative or marginal firms. Price tends always to fall toward cost. If price for any length of time falls below the cost of representative or marginal concerns, they will be forced out of business. If price for any length of time rises above the cost of representative or marginal concerns, new enterprises will be attracted to the given branch of industry, and the new supply will bring price down to cost again. Normal costs to representative concerns are the center about which actual prices fluctuate. Market prices oscillate around normal prices; market values tend toward normal values.

To summarize the principles of normal price we may state the following propositions: first, normal price rests upon the assumptions of free competition and long run periods of time; second, under these assumed conditions, the inequalities of costs among individual concerns in a given branch of industry tend to be wiped out and to center at a normal or representative level; third, normal price or value tends to fall to the point of representative or normal cost; fourth, market values tend toward normal values, except as they are impeded by imperfect competition, short run periods of time, or other extraordinary forces.

Monopoly Value.-The foregoing considerations assume free competition. This ideal assumption is not fully realized in the real world. Combination in restraint of competition is a commonplace. Monopoly in varying degrees appears at every hand. It is necessary to consider therefore the modification of value theory necessary under conditions of monopoly.

Under perfect monopoly, the producer has complete control of the supply of goods. Monopoly thus affects value primarily from the supply side of the value equation. Monopoly does not control demand, and cannot materially affect value from the demand side of the value equation.

Monopoly price will be that price expected to yield in the long run the maximum monopoly profit. This does not imply that the most profitable price will be the highest price. Profit depends not only upon price but upon quantity of sales. If an excessive price chokes demand and leads to a severe slump in sales, the possibility of profit is cut off. Let us assume that a publishing house has a monopoly of a book. The problem of monopoly price is to determine which price, when allowance

for volume of sales is made, will yield the greatest profit. The monopoly may make such comparisons as the following:

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From comparison of the profit due to three possible prices, it is obvious that the highest price does not necessarily lead to the highest profit. A price lower than $2.50 might increase the total sales somewhat, but not enough to yield as much net profit as the former price. Monopoly price is that price which, considering quantity of sales, will bring the largest profit in the long run.

A perfect monopoly will arbitrarily limit supply to the point where price multiplied by quantity sold will give the greatest gain. Monopoly price is set and maintained by virtue of an artificial regulation of supply. Deliberate restriction of supply is the key to monopoly control. This is the weapon which constitutes monopoly power.

Monopoly price will tend to be highest with goods of inelastic demand. If the price is raised, the demand is steady and firm, and sales will not materially fall off. Practically as many units will be sold as before, and each unit will bring a higher price. On the other hand, monopoly price will tend to be moderate with goods of elastic demand. If the price is raised, demand is highly flexible, and people will go without the goods. Monopoly power is especially baneful in the case of necessities, since these have relatively inelastic demand. No matter how much a monopoly might elevate the prices of salt or bread, people would have to buy these commodities in large volume. Monopoly power is not so injurious in the case of luxuries, since these have an elastic demand. If a monopoly raises luxury prices, sales will slump severely.

In the actual business world, neither perfect competition nor perfect monopoly is commonly found. What is found is imperfect competition and incomplete monopoly. Under these conditions, the competitive laws of value still work themselves out, but against much friction and opposition. Competitive price is still that price which tends to bring the buyer of marginal demand and the seller of marginal cost together. But this tendency is crippled and delayed by countless combinations in restraint of trade, price fixing agreements, and semi-monopolies. In so far as monopoly power becomes established, price will be held above cost by the device of an artificial limitation of supply. Here are two warring tendencies: competition tending to drive price down to cost, monopoly tending to hold price above cost. The resultant of these

antagonistic forces is such compromise as reflects the relative intensity of the two forces in any given case.

The mere fact that varying degrees of monopoly are present should not obscure the fact that underneath, the forces of actual and potential competition are ever present. Likewise, the mere fact that competition in some degree is present should not lead to the fallacy of assuming a perfect state of competition and of expecting quick and sure working out of the laws of competitive value. If competition is tediously slow in driving price down to cost, the cause is to be found in the friction set up by monopoly. If monopoly fails to sustain price at an excessive height, the cause is to be looked for in the unexpected vitality and force of competition. Monopoly is a disturbing factor which protracts and delays the working out of the normal values of competition, and which occasionally frustrates them altogether.

The Evolution of Value Theory.-The analysis of value theory, involving marginal concepts of supply and demand, is in general the orthodox doctrine of the main part of the generation of economists who did most of their creative thinking and writing in the first two decades of the present century. Not all would agree on the details, but they would agree on the substantial trend of the argument. This more or less standard set of principles is the culmination of an evolutionary process of thought. Several previous generations struggled with particular phases of value theory. Through much dispute and discussion, there was gradually built up a balanced and well-rounded system of thought on the subject. Each authority may have been wrong in many respects, but the essence of each writer's contribution had qualities of permanence. These various angles of development have been woven into a harmonious whole of economic theory. We may mention a few of the major phases of this development, although we cannot in present space pretend to give anything like an adequate historical outline of value theory.

In 1776, there appeared a volume from the hand of an English economist, Adam Smith, under the title of The Wealth of Nations. Adam Smith's theory of value is indicated in its main outlines by the following extracts from his book:

Labor is the real measure of the exchange value of all commodities. Equal quantities of labor at all times and places may be said to be of equal value to the laborer. Labor, never varying in its own value, is alone the ultimate and real standard by which the value of all commodities can at all times and places be estimated and compared. The proportion between the quantities of labor necessary for acquiring different objects seems to be the only circumstance which can afford any rule for exchanging them for one another.3

In 1817, David Ricardo, an English stockbroker of Jewish extraction, published his economic views under the title of The Principles of Political Economy. Although he took exception to certain of Smith's 3 Volume I, Chapter V.

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