Society is greatly benefited by any reduction of costs and men of inventive genius are constantly at work seeking to bring this about. The man whose costs are lowest can sell at the lowest price without suffering loss and, on the other hand, make the big gest profit when prices are high.
With which of these various costs does value tend to coincide? Is it with the lowest cost, with the high est cost, or with the average cost? It may seem paradoxical to the reader who has never thought of this subject before, yet it is a fact that the value of any article always tends to coincide with the cost of that part of the supply which is pro duced at the greatest disadvantage, so that in any in dustry those factories in which costs are highest are more important in the determination of value and market prices than all the others. For convenience such factories are called the marginal producers. They are said to be on the margin of production.
It is evident that the marginal producer, the man whose costs are highest, is the most anxious about prices, is least willing to sell when prices are low, and is the first to suffer loss when the market for his article weakens. He stands, as it were, on the margin of prosperity, on its very edge, and is easily pushed over the precipice into bankruptcy.
In times of great prosperity, when the prices of many articles are advancing, the marginal producers in some industries begin to make great profits, then more entrepreneurs and more capital are attracted into those industries, more factories are built, and more goods are manufactured, even tho the cost in the new factories exceeds that in any of the old. The old marginal producers are now no longer on the maigin, a new class stands there, and as a result of the increase in the output there is .normally a tendency toward lower prices. If prices do go back to the old level, the new marginal producers are the first to suffer and those who are financially weak are compelled to withdraw from the game. 0:30n the other hand, if in spite of the increased supply- the market absorbs all the product and demands more, then prices will continue to rise and still other producers, some of them not well equipped to cope with the problem of costs, will enter the field and thus again a new class of marginal producers will be created.
It follows therefore that in economics the marginal producer is an important personage, rivaling the marginal consumer. The one is least anxious to sell
and most anxious for a high price ; the other is least anxious to buy and is insistent upon a low price. Figuratively speaking, these two people meet in. the world's markets, do their best to circumvent each other, higgle and haggle and bargain, accuse each other of various unfair practices—and the outcome of all their dickering and bickering is the market price.
It goes without saying that no man would like to admit that he is a marginal producer; it would seem to be an admission of incompetence or stupidity-. Nor do marginal consumers advertise themselves as such lest they be suspected of meanness and stinginess. In reality these two important classes in any com munity fight out the price-fixing battle, not only with out knowing one another, but even without knowing that they are engaged in it. The marginal consumer fights when he walks out of a store without buying because the price is too high; the marginal producer fights when he shuts down his factory and curtails the output, virtually saying to the consumer, "If you won't pay my price, you can't have any more goods from me." 4. Costs when competition is the forego ing discussion freedom of competition has been as sumed, men being free to enter any industry which offers satisfactory returns. But this should not be understood to mean that there is any large body of capital standing ready to enter an industry at an in stant's notice as soon as a prospect of a satisfactory return appears. For several reasons capital and labor cannot always be advantageously transferred from one industry to another. In the first place, in many industries different kinds of skilled labor are required, and the supply of this is usually limited. In the second place, the business manager of many an industry must be a man possessing not only execu tive ability but also technical knowledge, and the number of such men is limited; in fact, such men are usually well employed. In the third place, many industries are dominated by such large combinations of capital that a newcomer is at a disadvantage in the purchase of raw materials and in the transporta tion of his products, not to mention the fact that his big competitor enjoys the advantages of large-scale production, can usually increase its output easily, undersellihim, and finally drive him from the market.