V.V.21
But if we turn to consider the normal supply price with reference to a long period of time, we shall find that it is governed by a different set of causes, and with different results. For suppose that the disuse of meat causes a permanent distaste for it, and that an increased demand for fish continues long enough to enable the forces by which its supply is governed to work out their action fully (of course oscillation from day to day and from year to year would continue: but we may leave them on one side). The source of supply in the sea might perhaps show signs of exhaustion, and the fishermen might have to resort to more distant coasts and to deeper waters, Nature giving a Diminishing Return to the increased application of capital and labour of a given order of efficiency. On the other hand, those might turn out to be right who think that man is responsible for but a very small part of the destruction of fish that is constantly going on; and in that case a boat starting with equally good appliances and an equally efficient crew would be likely to get nearly as good a haul after the increase in the total volume of the fishing trade as before. In any case the normal cost of equipping a good boat with an efficient crew would certainly not be higher, and probably be a little lower after the trade had settled down to its now increased dimensions than before. For since fishermen require only trained aptitudes, and not any exceptional natural qualities, their number could be increased in less than a generation to almost any extent that was necessary to meet the demand; while the industries connected with building boats, making nets, etc. being now on a larger scale would be organized more thoroughly and economically. If therefore the waters of the sea showed no signs of depletion of fish, an increased supply could be produced at a lower price after a time sufficiently long to enable the normal action of economic causes to work itself out: and, the term Normal being taken to refer to a long period of time, the normal price of fish would decrease with an increase in demand*40.
V.V.22
Thus we may emphasize the distinction already made between average price and normal price. An average may be taken of the prices of any set of sales extending over a day or a week or a year or any other time: or it may be the average of sales at any time in many markets; or it may be the average of many such averages. But the conditions which are normal to any one set of sales are not likely to be exactly those which are normal to the others: and therefore it is only by accident that an average price will be a normal price; that is, the price which any one set of conditions tends to produce. In a stationary state alone, as we have just seen, the term normal always means the same thing: there, but only there, "average price" and "normal price" are convertible terms*41.
V.V.23
§ 5. To go over the ground in another way. Market values are governed by the relation of demand to stocks actually in the market; with more or less reference to "future" supplies, and not without some influence of trade combinations.
V.V.24
But the current supply is in itself partly due to the action of producers in the past; and this action has been determined on as the result of a comparison of the prices which they expect to get for their goods with the expenses to which they will be put in producing them. The range of expenses of which they take account depends on whether they are merely considering the extra expenses of certain extra production with their existing plant, or are considering whether to lay down new plant for the purpose. In the case, for instance, of an order for a single locomotive, which was discussed a little while ago*42, the question of readjusting the plant to demand would hardly arise: the main question would be whether more work could conveniently be got out of the existing plant. But in view of an order for a large number of locomotives to be delivered gradually over a series of years, some extension of plant "specially" made for the purpose, and therefore truly to be regarded as prime marginal costs would almost certainly be carefully considered.
V.V.25
Whether the new production for which there appears to be a market be large or small, the general rule will be that unless the price is expected to be very low that portion of the supply which can be most easily produced, with but small prime costs, will be produced: that portion is not likely to be on the margin of production. As the expectations of price improve, an increased part of the production will yield a considerable surplus above prime costs, and the margin of production will be pushed outwards. Every increase in the price expected will, as a rule, induce some people who would not otherwise have produced anything, to produce a little; and those, who have produced something for the lower price, will produce more for the higher price. That part of their production with regard to which such persons are on the margin of doubt as to whether it is worth while for them to produce it at the price, is to be included together with that of the persons who are in doubt whether to produce at all; the two together constitute the marginal production at that price. The producers, who are in doubt whether to produce anything at all, may be said to lie altogether on the margin of production (or, if they are agriculturists, on the margin of cultivation). But as a rule they are very few in number, and their action is less important than that of those who would in any case produce something.
V.V.26
The general drift of the term normal supply price is always the same whether the period to which it refers is short or long; but there are great differences in detail. In every case reference is made to a certain given rate of aggregate production; that is, to the production of a certain aggregate amount daily or annually. In every case the price is that the expectation of which is sufficient and only just sufficient to make it worth while for people to set themselves to produce that aggregate amount; in every case the cost of production is marginal; that is, it is the cost of production of those goods which are on the margin of not being produced at all, and which would not be produced if the price to be got for them were expected to be lower. But the causes which determine this margin vary with the length of the period under consideration. For short periods people take the stock of appliances for production as practically fixed; and they are governed by their expectations of demand in considering how actively they shall set themselves to work those appliances. In long periods they set themselves to adjust the flow of these appliances to their expectations of demand for the goods which the appliances help to produce. Let us examine this difference closely.
V.V.27
§ 6. The immediate effect of the expectation of a high price is to cause people to bring into active work all their appliances of production, and to work them full time and perhaps overtime. The supply price is then the money cost of production of that part of the produce which forces the undertaker to hire such inefficient labour (perhaps tired by working overtime) at so high a price, and to put himself and others to so much strain and inconvenience that he is on the margin of doubt whether it is worth his while to do it or not. The immediate effect of the expectation of a low price is to throw many appliances for production out of work, and slacken the work of others; and if the producers had no fear of spoiling their markets, it would be worth their while to produce for a time for any price that covered the prime costs of production and rewarded them for their own trouble.
V.V.28
But, as it is, they generally hold out for a higher price; each man fears to spoil his chance of getting a better price later on from his own customers; or, if he produces for a large and open market, he is more or less in fear of incurring the resentment of other producers, should he sell needlessly at a price that spoils the common market for all. The marginal production in this case is the production of those whom a little further fall of price would cause, either from a regard to their own interest or by formal or informal agreement with other producers, to suspend production for fear of further spoiling the market. The price which, for these reasons, producers are just on the point of refusing, is the true marginal supply price for short periods. It is nearly always above, and generally very much above the special or prime cost for raw materials, labour and wear-and-tear of plant, which is immediately and directly involved by getting a little further use out of appliances which are not fully employed. This point needs further study.
V.V.29
In a trade which uses very expensive plant, the prime cost of goods is but a small part of their total cost; and an order at much less than their normal price may leave a large surplus above their prime cost. But if producers accept such orders in their anxiety to prevent their plant from being idle, they glut the market and tend to prevent prices from reviving. In fact however they seldom pursue this policy constantly and without moderation. If they did, they might ruin many of those in the trade, themselves perhaps among the number; and in that case a revival of demand would find little response in supply, and would raise violently the prices of the goods produced by the trade. Extreme variations of this kind are in the long run beneficial neither to producers nor to consumers; and general opinion is not altogether hostile to that code of trade morality which condemns the action of anyone who "spoils the market" by being too ready to accept a price that does little more than cover the prime cost of his goods, and allows but little on account of his general expenses*43.
V.V.30
For example, if at any time the