COSTS AND COMPETITIVE PRICES 5 1. Competitive prices and unequal costs of competition. 5 2. Selling and cost-finding. 5 3. Examples of joint costs. f 4. Main classes of costs. 5 5. The problem of cost accounting. 5 6. Homogeneous products with unequal costs. 5 7. Principle of charging what the traffic will bear. f 8. How prices are limited under competition. 5 9. Borderland of monopoly. f 10. Difficulty of departing from average costs in compe tition.
§ 1. Competitive prices and unequal costs of competi tion. The product of a business must be sold, and for this some special selling management and selling organization is required. In a mercantile business selling is the largest part of the activity, and to this end well-located stores, window dis plays, clerks, agents, expensive advertising, and delivery wagons are needed. The prime cost of the articles at whole sale, plus certain minor expenses, plus the selling cost, make up the whole cost of doing business. In all other kinds of business whether agricultural, manufacturing, transportation, etc., selling is an important task, which must be well done if all the other labors of management are not to be in vain. The products of a factory will not sell themselves, and the obtaining of a regular series of orders sufficient to use the equipment fully is one of the most essential conditions of a low unit cost of production.
The selling price must as a whole equal coat or there will be a loss. New factories are constantly arising with new and better adjustments and the processes are always changing. No two enterprises have exactly equal advantages of location for materials or markets, etc., or are managed with exactly 369 equal ability. Hence there is always a pressure of competi tion on some managers who constantly complain that they must sell below the cost of production. Business men say that competition is destructive, and it certainly does destroy the less favorably situated enterprises. Each enterpriser's price is the highest he can get in the market for his product; it may far exceed his costs; it may fall below them, but only temporarily, for if sales continue to encroach on capital, the sheriff soon closes the doors. Successful competitors are con stantly pressing upon the marginal enterpriser, fixing a price that leaves themselves a profit, but is below his cost. Even the most successful manager comes into contact with cost, and seems to be compelled by it. He reaches out for trade, and sells some (not all) goods at a price which leaves him little if any profit. He enlarges his factory and ships goods farther,
paying the freight, which means a lower price at the factory. The expanding business, therefore, comes at length to the point where it can not go farther at the prevailing prices. Hence the business man's view of the costs is that they de termine price. It is true in the sense that the supply of a particular product in any market is at last limited by cost to marginal producers or of marginal portions of supply. But it is not true of all the units of product that costs deter mine, or equal, market-price. There is a margin above costs to the successful enterpriser on a large portion of his output. The margin may be narrow or wide, according to the busi ness. The margin is "profit," on the particular sale, and helps to determine the true profit remaining at the end of the year.
§ 2. Belling and cost-finding. Speaking generally, there is no upper limit to the selling price the seller would take, but he can never get an unlimited, and rarely what he deems a really liberal price. Buyers are striving to buy as low as they can. The seller must often decide whether to sell at an offered price or to refuse the offer. Success in getting orders requires under most circumstances that the cost of each article to the seller shall be pretty exactly determined, or at least a minimum fixed below which the selling agent must not go. The ascertaining of the cost of particular articles, which be fore a study of the facts appears so simple, is in a literal sense well nigh impossible. It is easiest where the whole under taking is treated as one transaction, as the buying of a house, perhaps making some improvements in it, and selling it. There the total of first cost, plus costs of improvements, taxes, insurance, repairs, fixed charges, etc., subtracted from sell ing-price plus other receipts as rents, etc., give the balance as profit. Similarly it is easy to determine with sufficient prac tical accuracy the cost of the whole business in a year, which, subtracted from total receipts (and taking due account of the difference in inventory and appraisement of the plant at the beginning and end of the year), gives the profit. But the difficulty is in deciding how much of this total cost should be allotted to particular units of product, for most of the costs have been incurred for a number of different units which must be produced at once. The costs are joint, and not sev eral. Some simple illustrations will make this clearer.