Suppose that a producer controls the whole supply of a given good in a certain market and that he wishes to make use of his control to secure as much profit for himself as possible. Suppose further that the above table represents correctly the number of units of the good which the public will buy at the prices indicated in the second column. Assume also that the cost of producing a unit of the good is the same no matter how many units are produced.

As the price is lowered successively from a dollar per unit to 80, 60, and 40 cents, the number of units which can be sold increases from one hundred to two, three, and four hundred. The gross receipts increase as the number of units sold is increased up to the point where three hundred units are sold. As the number of units sold is increased from three hundred to four hundred, the gross receipts fall from $180 to $160. The cost of producing each unit is assumed to be 50 cents. The fifth column represents the total cost of production and is obtained by multiplying the number of units sold by 50 cents, the cost of producing each unit. The last column is obtained by subtracting the total cost of production from the gross receipts. It is evident that the monopoly price for this good under the conditions assumed is 80 cents, since at this price 200 units will be sold and a profit of $60 will be realized. At any other price represented in the table, whether higher or lower, a smaller profit would be obtained. The - 40 in the profits column represents a minus profit or a loss of $ 40.

In the following table the same demand is assumed as in the preceding table but the enterprise is represented as obeying the law of diminishing costs. As the volume of production increases, the cost of production per unit diminishes. In the second table the monopoly price is seen to be sixty cents. At this price three hundred units will be sold and a profit of $90 will be obtained. This is a higher profit than can be secured at any other selling price represented in the table. Since the difference between the two tables comes from changing the assumption as to the cost of production per unit, it is evident that monopoly price depends upon cost of production as well as upon the demand for the good.

Number of

Units Sold

Selling Price per Unit

Gross

Receipts

Cost op producing Each Unit

Total Cost op Production

Profit

100

$1.00

$100

50 cents

$50

$50

200

.80

160

40 cents

80

80

300

.60

180

30 cents

00

90

400

.40

160

20 cents

80

80

Questions

1. What is meant by an exchange?

2. Why do men exchange goods?

3. Make a general definition of value that will include both value in use and value in exchange.

4. Show how values in use are influenced by values in exchange.

5. Compare the concepts of value and weight.

6. What is meant by saying that value is subjective-objective?

7. What is a market?

8. Upon what does value depend?

9. What is a demand schedule?

10. What is a demand curve?

11. Distinguish between a law of diminishing costs and a law of diminishing returns.

12. Construct an imaginary demand schedule and a corresponding supply schedule and explain where the price will be located.

13. Draw demand and supply curves to illustrate the situation described in the preceding question.

14. Define monopoly.

15. Classify monopolies and illustrate the different classes.

16. State the law of monopoly price.

17. Construct tables to illustrate the law of monopoly price.

Supplementary Reading

Carver, Distribution, Chap. i.

Devas, Political Economy, Book II., Chaps. i. and ii.

Marshall, Principles, Book V.

Seager, Principles, Chaps. vi. and vii.

Seligman, Principles, Part III., Book I.

Walker, Political Economy, Part III., Chap. i.