In so far, however, as competitive conditions do prevail, the market price of an article tends to coin cide with its highest cost of production. An agri cultural product like wheat furnishes a good illus tration. When wheat sells at $1 a bushel, no farmer will knowingly 'sow it on a field where its cost will exceed that sum. If its price advances to $1.50 be cause of an increase in the demand for it, without a corresponding increase in the supply, farmers will then cultivate it on fields where, because of less fer tility or more distant location, the cost is near that figure. If the, price rises to $2, still poorer and more distant land is brought under cultivation.
Let us suppose that there are ten different varieties of wheat land in a certain country, calling the best No. 1 and the poorest No. 10, and let us suppose that $2 a bushel covers the cost of producing wheat on land No. 8. If the demand for wheat is such that wheat can be sold at $2, land No. 8 will be cultivated; but if the price falls below $2, the cultivation of that land will cease. Thus variations in the supply of wheat which affect value are due to changes in the supply of wheat produced on the poorest land under cultivation. For this reason economists call such land marginal land and hold that the price of wheat in the long run tends to coincide with its marginal cost, that is, with its cost of production on the land least fitted for its cultivation.
The reader should note that the value of wheat is not determined by the cost of its production. No consumer pays $2 for wheat because it costs that sum. Nor is any producer, or set of producers, able to fix the price. The price is the result of competi tion among the buyers who want the goods, and of competition among the producers who are unwilling to produce unless they can make a profit. In a sense this competition is involuntary and unconscious; the consumer is simply seeking to get the most satis faction out of the expenditure of his income; the producer is thinking merely of compensation for his labor and enterprise. The consumer will not pay for an article more than it seems worth to him. The producer will not make the article unless he can sell it at a profit. As a result of this involuntary com petition among consumers and producers, we have changes in the demand for and supply of goods and, consequently, changes in their values.
5. Monopoly costs and prices.—When a concern has a virtual monopoly in the manufacture and sale of any article, the competition of other producers being a negligible quantity, it is able by the regulation of its own output to exercise great command over the value and market price. An absolute monopoly can, of course, exact any price from a consumer that it pleases to ask, but it cannot compel the consumer to buy. If it wishes to make the most money possible it must give heed to consumers' wants, whims and caprices. It may regulate supply, but it cannot con trol demand. For this reason it is wrong to think of monopolistic prices as being dependent entirely upon the will of the monopolist.
A monopolistic concern is, of course, in business for the purpose of making money. If it is a cor poration its direc'tors wish to be able to pay large dividends to its stock-holders. The aim of monopoly is the greatest possible profit, not the highest possi ble price at which some of its goods may be sold. In determining the price that shall be asked, the manager of a monopolistic business thinks not of the cost of production but of the possible sales and profits at different prices. He is anxious to find the price that will yield the maximum net profit. That price may be a low one, not far above the cost of production, for at the low figure the demand may be enormous; or the price may be MO per cent above the cost and yet the sales be sufficient to yield a profit larger than if the price were lower. A monopolist is not much concerned about the amount of profit per article; the largest possible net income is what he wants, and he is quite ready to offer his article at a low price if in that way he secures the desired result.' 6. Regulation of supply.—The regulation of the supply of an article produced under conditions of free competition is manifestly a difficult matter. The greater the number of competitors, the greater the difficulty. If there are only a few competitors, each can get some knowledge of the plans and of the capacity of the others and so regulate his own output that a surplus product shall not be thrown on the market. But when the number of competitors is large, each works more or less" in the dark, being un certain both as to the streng,th of the demand and the amount of the forthcoming supply.