As a general rule the cost of producing a unit of a good depends upon the number of units that are to be produced. While a person's demand for a good depends upon the utility of the good to him and his purchasing power, the supply of a good in a market depends, as a general thing, upon its cost of production. The money cost of producing goods depends in the last analysis upon the utility of the goods and the amount of purchasing power in the community. In this elementary treatise, however, it will not be necessary to make this ultimate analysis of cost. For our present purpose we need to consider only the cost of individual goods and not the question of the general level of costs.

Some goods are produced under such conditions that the larger the number produced the greater will be the cost of production per unit. In the production of other goods the cost per unit is practically the same no matter how many goods are produced and in the case of still other goods the greater the number of units produced the smaller will be the cost of production per unit. Goods of the first class are said to obey a law of increasing costs; goods of the second class obey a law of constant costs; and goods of the third class are produced according to a law of diminishing costs. These notions of increasing costs and diminishing costs must not be confused with the law of increasing returns and diminishing returns discussed in a previous chapter. The law of diminishing returns is concerned with the relative proportions of land, labor, capital, and enterprise in the business unit. In the discussion of increasing costs and diminishing costs it is assumed that different productive factors are combined in the most effective proportions and the interest is focused upon the absolute quantities of the several factors rather than upon their relative proportions.