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. same trouble and expense were bells which turned out sound. 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.

When it was being cast the incurred for it as for other Its Expenses of production

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. III. § 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.

increase of

normal de

Firstly as to the mutual influences which changes in demand Effects of an 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. III., § 4).

Diminishing

increased supply can be raised only at a more than proportionate increase of cost, and the price there- The cases of fore must be permanently higher than before. Increasing and But in the latter case the increased production Return. will gradually develop new economies; and the normal expenses of production, and therefore the normal value of the commodity, will be lower than before. In the former case the advent of new purchasers injures others by Effects on making them buy at a higher price; and lowering Consumers' the Consumers' Rent (See above, Book III. ch. VI.) which they derive from the commodity. In the latter case it benefits others by increasing their Consumers' Rent. And from this it appears that the public wellbeing might conceivably be furthered by promoting the production and consumption of things in regard to which the Law of Increasing Return acts with especial force1.

Rent.

This result is important chiefly because it is the leading type of a great many cases in which the private interests of individuals, even when competing freely, lead them into courses that are not the best that could be contrived in the public interest. And this opposition between public and private interests, becomes more clearly marked in the case of monopolies.

determined.

§ 2. It is indeed a familiar commonplace that the owner of a monopoly is tempted to limit his supply so How a monoas to raise his price very high, and reap benefits poly price is for himself at the expense of the public. His gains are the aggregate excess of his sales over his outgoings; and his immediate interest is so to fix his price (and therefore the amount of his sales) as to make this sum as large as possible. If a small supply can be sold at a very much higher price than a large one, his supply will generally be small; and

1 This is argued at some length, and with the aid of diagrammatic illustrations in Principles, V. XII.

the Consumers' Rent that the public derive from the commodity will be very small.

If however an increase in supply would not raise his aggregate expenses nearly in proportion, if the commodity is one of which increased quantities can be sold without causing a very great fall in price, then he may benefit himself a little, even directly, by increasing his production a great deal and lowering his price a little. And by so doing he will benefit others a great deal: for the Consumers' Rent derived from his commodity will be very much increased.

may cause a great Consumers' gain.

Next suppose that by increasing his supply he will lower A small loss to the selling price of his commodity relatively the Monopolist to his outlay for producing it, so far as to lessen his net income by a little but only by a little. Suppose for instance that he stands to lose £2000 a year by a lowering of price that would increase by £100,000 a year the Consumers' Rent derived from his commodity; then it would be worth while for the community to pay him a sufficient sum to induce him to make the change. Or in such a case he might make the change voluntarily,

The monopolist may lower prices with a view to

the growth of his business,

and that for either of two motives.

He might

hope that the lower price would gradually extend the consumption of his commodity, and that a further increase of sales would ere long bring up his net revenue to its old level or beyond it; even if the increased scale of production did not develop new economies of production, in addition to those which he had in view when he calculated that the change would cost him the loss of £2000 a year.

welfare of con

But secondly he might regard the well-being of the conor from a direct sumers as not altogether indifferent to him. interest in the Sometimes the owners of a monopoly are themselves directly or indirectly the chief consumers of its products, as for instance when a local railway is owned by the chief landowners in the neighbourhood; or when the

sumers.

gas supply of a town is the property of the town itself; and in such cases it would always be a wise policy to sacrifice a little of monopoly revenue in order to obtain a great increase of Consumers' Rent. And in some other cases, the owners of a monopoly will take a price that affords them less than the greatest net revenue, because they are willing to sacrifice themselves a little in order to benefit the consumers of their goods much. There are few more pressing studies than those of the relative gains and losses which will accrue to monopolists and the public severally from different courses of action. The problem cannot easily be clearly defined without the aid of diagrams; and it cannot be solved for practical purposes without fuller and more exact statistics than we at present possess1.

1 The problem is treated at length by the aid of diagrams in Principles, V. XIII.