COMPETITIVE PRICES 57 petition, restrained by the self-interest of competitors, tends to establish. Artificial though the above illustration is, it comes close to representing the forces which determine competitive prices generally. Rival sellers do not entrust their goods to an auctioneer, but they act jointly very much as he acted in the assumed case. Each has a minimum price determined by his expenses of production. All wish the largest number of sales at the highest attainable price. Their inclination as individuals is to put up the price. As competitors they tend to lower it to enlarge the volume of their sales. When competition is active among a number of sellers with varying expenses of production, the price tends to be fixed at a point which affords profits to several, just pays the expenses of production of others and drives others out of business because it does not cover their expenses of production. The part which buyers play in bringing about this result is by seeking constantly for the cheapest market. Their competition is rarely actually excited, as it was assumed to be at the bicycle auction, but its potential force is indicated to sellers by the rapidity with which their goods are sold at the prices which they fix. The more attentive buyers are to their interests in getting goods at the lowest prices, the more likely are sellers to meet price-reductions promptly, so that there will be substantially one price for each particular good at any one time throughout the whole market. The price will be lower than many buyers stood willing to pay, it will just about suit the ideas of others, while still others will find it too high. In stating that two-sided competition will tend to establish one uniform price instead of a variety of prices for identical units of the goods sold, we are simply describing a fact of common observation in highly organized markets. Experience has taught both buyers and sellers the advantage of agreeing upon the one price at which a maximum number of sales may be effected, and all the machinery of competition, published price lists, clearly marked prices on goods offered for sale, etc., is designed to bring this about. Only in communities in a backward condition industrially, as in Italy for example, do any large number of sellers at retail continue to make the determination of the price at which each good shall be sold a matter for a special bargain. The time that is wasted in useless higgling when this plan is followed is convincing proof of the superiority of the one-price system. In the wholesale trade special bargains between the wholesale dealer and his customers are more common and skill in bargaining is an important requisite to success. The price limits within which such bargaining is confined are, however, narrow, as the wholesaler is always restrained in individual transactions from making too great concessions by the fear that he may alienate his other customers. Generalizing on what has been said, we may conclude that two-sided competition and bargaining among buyers and sellers tend to establish one price or a narrow range of prices for each good and that this corresponds to the money equivalent of the marginal utility of the good to the buyer who is just induced to buy and to the expense of production of the seller whose supply is necessary, along with the supplies of sellers who produce more cheaply, to satisfy the demand of the market. 32. Market Prices and Normal Prices.-A review of the four possible modes of price formation that have been described leads to the conclusion that the money equivalents of the marginal utilities of the goods offered for sale to those whom we may style the marginal buyers, that is, the buyers who are just induced to buy, always have an important influence on prices. Who the marginal buyers shall be, depends in turn always on the supplies of goods that are sold. In case there is only a limited number of units of a good in existence or its production is controlled MARKET AND NORMAL PRICES 59 by a monopoly, the supply is absolutely or arbitrarily fixed, and the price to be obtained for such supply may be said to be determined by what the marginal buyers will pay. In the more common case of freely reproducible goods prices correspond on the buyers' side to what the marginal buyers will pay, on the sellers' side to what the marginal sellers are willing to accept. Over short periods marginal sellers may be willing to accept whatever prices market conditions enable them to obtain. Market prices are, therefore, fluctuating prices rising and falling from day to day or even from hour to hour. Over long periods, however, marginal sellers cannot afford to accept less than will cover their expenses of production. This fact leads economists to recognize that behind fluctuating market prices are normal prices, corresponding to the expenses of production of marginal sellers. These are the standards about which market prices tend to fluctuate. Before attempting to define more precisely normal prices or to analyze the elements that enter into the expenses of production of marginal sellers, we shall find it advantageous to study the subject of production itself. For it is only after the whole circle of production, distribution and consumption has been traversed that all of the elements that enter into the determination of values and prices can be understood. * REFERENCES FOR COLLATERAL READING * Seligman, Principles of Economics, Part III., Book I.; Clark, Essentials of Economic Theory, Chaps. VI. and VII.; * Bullock, Selected Readings in Economics, Chap. XIII.; * Fetter, Principles of Economics, Chap. V.; * Carver, Distribution of Wealth, Chap. I.; * Marshall, Principles of Economics, Book V.; * Pierson, Principles of Economics, Part I., Chap. I.; Smart, Introduction to the Theory of Value; * Böhm-Bawerk, Positive Theory of Capital, Book III. CHAPTER IV PRODUCTION: LAND AND NATURAL FORCES 33. Definition of Production.-Production has already been defined as the creation of utilities. That man can not create matter is a familiar truth. All that he can do is to rearrange particles of matter so as to create form utilities; or move goods from one part of the world to another so as to create place utilities; or preserve goods from one period to another so as to create time utilities; or, finally, transfer goods from the ownership of one individual to that of another so as to create possession utilities. Any activity which contributes to the creation of utilities in either of these ways is production. A school of French economists of the eighteenth century, the Physiocrats, gave currency to the belief that agriculture is productive in a special and peculiar sense. They even went so far as to characterize manufacturing and mercantile pursuits as sterile, or unproductive. Adam Smith, writing in 1776, took vigorous exception to this view, but he, too, speaks of nature as "laboring along with man” in farming, implying that it does not “labor along with " him also in his other occupations. Completer knowledge of the real nature of production has emancipated most minds from these misconceptions. They reappear from time to time, however, in criticisms of the activity of merchants, who are said to create nothing, but to live, like parasites, by buying things for less and selling them for more than they are worth. The obvious reply to such attacks is that merchants create time, place and possession utilities and that human well-being depends as THE FACTORS IN PRODUCTION 61 much upon these as upon the form utilities created by farmers and manufacturers. Convincing proof of the value of the services of merchants is furnished to city people when they go to live in the country in the summer and have to depend for the goods they require upon a distant and ill-stocked country store. The growing prevalence among country people of the practice of coming to town to do their shopping indicates, on the other hand, their practical appreciation of what the merchant does for the community. 34. Nature and Man the Factors in Production. As already implied, there are two essential factors in all productive processes: nature and man. Nature figures in production as an aggregate of materials and blind forces. Acting in conformity with invariable laws, she destroys as readily as she creates. Moreover, her productive services are always gratuitous to him who has the intelligence to command them. Man, on the contrary, appears as a being with conscious purpose. He also destroys—not ruthlessly, however, as nature seems to do, but in order to gratify his wants. In production man is the directing, active agent, nature the obedient, passive agency. Man marshals the materials and productive forces which nature supplies in the ways that experience has taught him to be best, and he alone enjoys the fruits of productive enterprise. Man and nature are the primary factors in production; secondary or derived from them is capital, the products of past industry used as aids to further production. With the abundant evidence on every side of the dominant rôle which power machinery and other forms of capital play in production as now carried on there is little need to emphasize the importance of this third factor. To capital is chiefly due the efficiency of contemporary productive methods, as contrasted with those of one hundred and fifty years ago, and also the division of the working population into employers and employees. These truths are so fa |