This section is from the "Elementary Principles of Economics" book, by Richard T. Ely and George Ray Wicker. Also available from Amazon: Elementary Principles Of Economics: Together With A Short Sketch Of Economic History
It remains for us to consider briefly but in detail some of the frictional elements which are most frequently present in modern business, preventing the realization of the perfectly competitive price.
1.Custom. One influence which we have to notice as being opposed to competition is that of custom. By force of custom, acting especially in retail markets, the prices of commodities may stand for some time above the normal level. It is evident, however, that custom is powerless to maintain a price below the normal, unless the seller has some economic advantage that he is willing to share with his customers. Otherwise such a price would spell ruin for the retail dealer.
2.Immobility of Labor. A second frictional element is the immobility of labor. Our law of value assumes a competition by which laborers will move freely from place to place, and from occupation to occupation. There are very many cases in which the facts of real life do not accord with this assumption, although it is true that with advancing civilization such competition approaches nearer and nearer to realization. It is easier than ever before for men to travel from places in which labor is plentiful to places in which labor is scarce. On the whole, it is easier than ever before for men to transfer their labor from one industry to another. Especially is it easier in our day for parents to choose the occupations for which they will train their children. But inasmuch as laborers are often prevented even now by home ties, or poverty, or ignorance, from carrying their labor to the best market for it, and inasmuch as they are similarly prevented in many cases from entering into occupations which might prove more remunerative, it often happens that labor in different places or in different occupations is not rewarded in proportion to the sacrifice involved. In such cases, although the supply of the commodity may be determined by the cost of production, yet the cost of production of different commodities will not be proportioned to the actual sacrifices incurred, and there is in such cases an apparent rather than a real exception to our theory of value.
3. Unequal Taxation. Unequal taxation also gives rise to exceptions to our theory of value, unless we are prepared to regard taxes themselves as a part of the cost of production. If taxes were laid in equal proportions upon all industries, so that all products were raised in price in equal proportion, then the ratio in which different commodities would exchange for one another might remain the same. In other words, values might not be affected. But such taxation is clearly impossible, and therefore we are obliged to qualify in this regard our theory of value.
4.Planless Production. In our complex industrial system producers have to plan their production for distant times and distant places, and in ignorance of what rival producers are doing. It can easily be seen that in such a state of things the production of some commodities may be carried far beyond the point at which the demand for the commodity is great enough to permit a price that will repay the cost of production. The resulting glut in the market may continue for some time before the entrepreneurs by lessening production can secure a return to normal prices. The technical condition of modern industry contributes strongly to the same result as that just described. When a producer has invested large amounts of capital in the form of expensive buildings and expensive machinery, he is not unlikely to continue production even when the price of the product is too low to repay all the costs. For when such large fixed capitals remain idle, the abstinence involved in the production of that capital is receiving no reward at all, to say nothing of the fact that the buildings and machinery may actually be deteriorating more rapidly than they would if they were busy. The entrepreneur, therefore, has to choose, not between gain and loss, but between a greater and a lesser loss, and in choosing the lesser loss, he may keep buildings and machinery working even when the market is glutted with the commodity which he is producing. It is for this reason among others that in modern days industrial depression, when it comes, is so long continued and distressful. Prices cannot easily or rapidly return to their normally competitive level when supply greatly outruns profitable demand.
5. Value of Products and By-products. The fifth case, that of products and by-products, really accords with our theory of value, but requires special attention. When as an incident to one main line of production, one or more products of less significance result, the chief commodity is called the product and the others by-products. Thus wheat is a main product of which straw is a by-product. To take another illustration, the Standard Oil Company has as its central industry the refining of crude petroleum into illuminating oils, but with every year scientific discoveries have made possible new uses for parts of the crude oil which were formerly thrown away. These inci-' dents to the production of illuminating oil, or by-products as they are called, include lubricating oils, aniline dyes, paraffin, etc. In such cases it is evident that the theory of value is complicated in its application. The general principle to be noticed is that the combined value of the products is determined by the total cost of production. Producers, of course, regulate the production of the joint products so as to secure the largest total return. This is commonly done by producing all of the main product that can be sold at profitable prices, at the same time selling the by-products at such prices as will insure their sale. In such cases, if the demand for the principal product increases, production also increases, and as larger quantities of the by-product naturally result, these must be sold at lower prices, unless it happens, as is unlikely, that the demand for the by-products increases at the same time and at the same rate as does the demand for the main product. Sometimes the demand for the by-product increases so greatly as to make it profitable to regulate production according to its price rather than according to the price of the main product. Thus in the case of mutton and wool, some sheep raisers are so situated that wool is the main product of their business, and mutton a by-product, while with other producers the order is reversed. We may say in conclusion, then, that the total prices of products and by-products are determined by total costs, and that the relative prices are determined, subject to this condition, by the relative market demand for the different commodities.
1.Subjective value is the capacity of any good to command a sacrifice. Objective or exchange value is the quantitative ratio in which any two goods exchange. The second sort of value depends upon the first.
2.Competitive value is the meeting point, or point of equilibrium, between supply and demand.
3.Different conditions of scarcity are : absolute scarcity, monopoly scarcity, and scarcity due to the sacrifices of production.
4.Cost of production, which controls supply, is used in at least three senses: expenses of production, pains of production, and sacrifice of opportunity.
5.The effective cost of any quantity of a good is the highest or marginal cost of producing that quantity.
6.Perfect competition is rarely if ever realized.
7.Frictional elements interfere with the free working of competition.
1.What is subjective value ? Objective value? What is their relation?
2.Show how a market price is determined.
3.Describe the three causes of scarcity of economic goods.
4.What are the various meanings of the term " cost of production" ?
5.What is meant by marginal costs?
6.What are some of the actual conditions opposed to the free working of competition?
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