CHAPTER VII. PRIME AND TOTAL COST IN RELATION TO JOINT PRODUCTS. COST OF MARKETING. INSURANCE AGAINST RISK. to the joint pro same business. § 1. WE may now return to the consideration of Prime and Supplementary Costs, with special reference Difficulties as to the distribution of the latter between proper ducts of the the Joint products of a business. For instance the shipowner has to apportion the expenses of his ship between heavy goods and goods that are bulky but not heavy. He tries, as far as may be, to get a mixed cargo of both kinds; and an important element in the struggle for existence of rival ports is the disadvantage under which those ports lie which are able to offer a cargo only of bulky or only of heavy goods: while a port whose chief exports are weighty but not bulky, attracts to its neighbourhood industries which make for export goods that can be shipped from it at low freights. Difficulties as From the expenses of transport we pass easily to those of marketing. Some kinds of goods are easily marto the expenses keted; there is a steady demand for them, and of marketing. it is always safe to make them for stock. But for that very reason competition cuts their price “ very fine," and does not allow a large margin above the direct cost of making them. Sometimes the tasks of making and selling them can be rendered almost automatic, so as to require very little to be charged on their account under the heads of the expenses of management and marketing. But in practice it is not uncommon to charge such goods with even less than the small share that would properly fall to them, and to use them as a means of obtaining and maintaining a business connection, that will facilitate the marketing of other classes of goods, the production of which cannot so well be reduced to routine; for as to these there is not so close a competition. Manufacturers, especially in trades connected with furniture and dress, and retailers in almost all trades, frequently find it best to use certain of their goods as a means of advertising others, and to charge the first with less and the second with more than their proportionate share of Supplementary expenses. In the former class they put those goods which are so uniform in character and so largely consumed that nearly all purchasers know their value well, in the second those with regard to which purchasers think more of consulting their fancy than of buying at the lowest possible price. Economic progress is constantly offering new facilities for marketing goods at a distance: it not only lowers Local facilities cost of carriage, but what is often more import- for marketing. ant, it enables producers and consumers in distant places to get in touch with one another. In spite of this, the advantages of the producer who lives on the spot are very great in many trades; they often enable him to hold his own against competitors at a distance whose methods of production are more economical. He can sell in his own neighbourhood as cheaply as they can, because though the Prime cost is greater for his goods than for theirs, he escapes much of the Supplementary cost which they incur for marketing. But time is on the side of the more economic methods of production; and his distant competitors will gradually get a stronger footing in the place, unless he or some new man adopts their improved methods. A great part of these expenses of marketing results from the risk that a thing preparing for a certain market will not find the expected sale there. But it still remains to make a closer study of the relation in which Insurance against the risks of a business stands to the supply price of any particular commodity produced in it. § 2. Insurance against risk. The manufacturer and the trader commonly insure against injury by fire and loss at sea; and the premiums which they pay are among the general expenses, a share of which has to be added to the Prime cost in order to determine the Total cost of their goods. But the greater part of business risks are so inseparably connected with the general management of the business that an insurance company which undertook them would really make itself responsible for the business: and in consequence every firm has to act as its own insurance office with regard to them. The charges to which it is put under this head are part of its general expenses, and a share of them has to be added to the Prime cost of each of its products. But there is a danger of allowing for these risks more than once. When a farmer has calculated the expenses of raising any particular crop with reference to an average year, he must not count in addition insurance against the risk that the season may be bad, and the crop a failure: for in taking an average year, he has already set off the chances of exceptionally good and bad seasons against one another. When the earnings of a ferryman have been calculated on the average of a year, allowance has already been made for the risk that he may sometimes have to cross the stream with an empty boat. When a manufacturer has taken the average of his sales of dress materials over a long time, and based his future action on the results of his past experience, he has already allowed for the risks that the machinery will be depreciated by new inventions that will render it nearly obsolete and that his goods will be depreciated by changes in fashion. If he were to allow separately for insurance against these risks, he would be counting the same thing twice over. This discussion of the risks of trade has again brought before us the fact that the value of a thing, though it tends to equal its normal (money) cost of production, does not coincide with it at any particular time, save by accident. The value in use of a bell with a flaw in it is very little; it can be used only as old metal and therefore its price is only that of the old metal in it. When it was being cast the same trouble and expense were incurred for it as for other bells which turned out sound. Its Expenses of production were the same as those of sound bells: but they have great value in use and are therefore sold at a high price. The price of each particular bell is limited by its value in use: what the Law of Normal Value states is that the price of cracked bells and sound bells together must in the long run cover the expenses of making bells1. 1 Carey suggested that we should speak of value in relation to (money) cost of Reproduction instead of in relation to cost of production. But normal cost of production and normal cost of reproduction are convertible terms; and no real change is made by saying that the normal value of a thing tends to equal its normal (money) cost of reproduction instead of its normal cost of production. The former phrase is less simple than the latter, but means the same thing. There are indeed a few cases in which the market value of a thing is nearer its cost of reproduction than the cost that was actually incurred in producing that particular thing; but, as a rule cost of reproduction exerts little direct influence on value, except when purchasers can conveniently wait for the production of new supplies. There is no connection between cost of reproduction and price in the cases of food in a beleaguered city, of quinine the supply of which has run short in a fever-stricken island, of a picture by Raphael, of a book that nobody cares to read, of an armour-clad ship of obsolete pattern, of fish when the market is glutted, of fish when the market is nearly empty, of a dress material that has gone out of fashion, or of a house in a deserted mining village. Compare above, Book v. Ch. 1. § 6. The present chapter is much compressed from the corresponding chapter of the Principles. CHAPTER VIII. CHANGES OF DEMAND AND SUPPLY. MONOPOLIES1. § 1. THERE remains but little of the general theory of Equilibrium of demand and supply, which can be treated simply and is needed for the broader practical issues of economics; and what there is, may be classed under the head of changes of normal demand and supply and under that of monopolies. Firstly as to the mutual influences which changes in demand Effects of an increase of normal de and supply, exert on one another. A sudden increase in the demand for anything will raise its mand on price. market price; but whether the permanent effect of an increase of normal demand for it, will be to raise or lower its price depends on whether it obeys the Law of Diminishing or Increasing Return. In the former case the 1 The present chapter is a sketch in rough outline of the main inquiries in Principles, V. XII. XIII.—chapters which deal with some rather difficult problems by aid of diagrams. Chapters VIII., IX., and x., of the Principles, Book V., discuss in detail Rent and Quasi-rent in relation to Cost of production: their general scope has been already indicated in the notes at the end of the second and last sections of Ch. III. of this Book. But nothing has yet been said of Principles V. XI. That is occupied with the following two questions. Firstly:-How far can we speak of the average expenses of production of commodities, part of which are made by machinery that was itself made long ago, so that its present capital value and therefore the charges to be allowed for its use stand in no direct relation to its own cost of production? Secondly: In what sense can there be a stable equilibrium between demand and supply price for a commodity which obeys the Law of Increasing Return? The answer to this second and more important question is to be found in a study of the expenses of production (and marketing) by that Representative firm to which reference has already been made (see above Book IV. ch. XIII. § 1, and Book V. ch. ш., § 4). |