8. V ariations in cost.—In some industries costs of production may remain stationary for a consider able period of time. Then, as a result ot competi tion, the producers who survive in these industries tend to become equally proficient; and a uniform cost is approximated, in accordance with which the market price is determined thru the regulation of the supply. In such industries a great increase in the output is often possible without any increase in the cost of pro duction per unit.
In other industries, notably the extractive, we have already shown that the law of diminishing returns ap plies. Hence as population -increases, costs tend to rise unless checked by improved methods -of pro duction and transportation.
In many of the manufacturing industries, under certain conditions a law of increasing returns prevails; and the tendency, therefore, is toward lower costs and prices as consumption increases. The causes are various. Among the most important are the advan tages of large-scale production, of which one of the most important is the manufacture of machinery in standard parts. A country, manufacturing only 1,000 automobiles is evidently at a disadvantage with the country manufacturing 500,000. Furthermore, as an industry increases in volurne it becomes more attractive to skilled labor; and its work, therefore, is more efficiently done. At the same time the very size of the industry- furnishes an incentive to the man ager to improve his organization to the utmost and to introduce economies which would hardly seem worth while in a smaller establishment.
There is a limit, of course, to the profitable growth of any industry under a single management, for there is a point beyond which the difficulty of superintend ence becomes insurmountable. There is, further more, a limit to a man's executive ability. Great executives in business are not numerous; and altho they can delegate much of their authority and re sponsibility, to others, yet experience has proved that too heavy a burden may be placed on the shoulders of any man however great his genuis for organization and control.
9. Joint cost.—Numerous articles are called by products because they are produced, not in the first instance because of their own utility, but in connec tion with more important articles. For example, the leading products of the Standard Oil Company are refined petroleum, or kerosene, and gasolene; but in the manufacture of these articles numerous other articles of less importance and value are produced, such as candles and vaseline. The demand for cattle is a composite demand for hides and beef. Neither
of these could be considered a by-product unless the demand for one was so great that it could be sold at a price so high that the price of the other would be a negligible quantity.
Does the value of two articles produced jointly tend to coincide with their joint cost on the margin of production? Or is the cost of one more important than the cost of the other? It all depends on the strength of the demand. Take a steer, for instance. If there is a strengthening demand for beef and its price doubles, while the demand for leather does not increase, there will be an increase in the production of beef and necessarily also an increase in the supply of leather. Leather will then weaken in price while beef is advancing, and if the demand for beef keeps on increasing, it is conceivable that leather might be come exceedingly cheap. The ranchman, of course, would think only of the price he could get for his steers; it would not matter to him whether the de mand for them was chiefly for hides or for beef.
In the long run, when competition prevails, the combined value of a product and all its by-products must tend to equal their joint cost. But at any time the market value of each is determined by the strength of the demand for it in relation to its supply, and a rise in the value of any one of them may cause some increase in the output of all.
10. Marginal utility compensates for marginal cost.—No sane man will work to produce something unless he expects satisfactory compensation in its en joyment. In economics this amounts to saying that no man will produce an article unless he can sell it at a price covering the money cost of production plus a satisfactory profit.
Let us take a simple illustration from rural life. Some children go berrying solely for the pleasure of eating the berries. They get great enjoyment out of it the first hour, a little less during the second hour ; and by the end of the third hour their enjoyment of the berries has declined and they have become so tired that they decide to rest before going home. In the language of economics the cost of berries to them has begun to exceed the utility of berries. Theoretically and strictly speaking, a child would stop picking ber ries the very moment the pain of the effort was not counterbalanced by the pleasure of eating them; or in the laniguage of economics, when the marginal util ity of berries had declined and the cost of production had increased until the two were equal. In this sim ple illustration we see at work the very forces which determine market prices.