SUPPLY AND DEMAND VERSUS COST OF 

 PRODUCTION 



WHAT makes hour-by-hour and day-by-day prices under 

 laissez faire conditions is not cost of production, but that 

 brute force which we call "supply and demand." In its blind 

 groping, this force necessarily approximates cost of production as 

 an average of any long period of time. But it never specifically 

 recognizes cost of production as a factor which should be con- 

 sidered. It approximates cost of production because it has to, 

 not because it wants to. 



An illustration of the strategy of the hog market is a case in 

 point. Imagine a Monday hog market in early March, at which 

 .season of the year prices are generally rising. Suppose that in- 

 stead of the accustomed 40,000 Monday hog run, 60,000 have been 

 received. Suppose that, owing to car shortage or some other 

 reason, eastern shippers are out of the market. There is a larger 

 supply than usual and a smaller demand, and prices decline 15 or 

 20 cents a hundredweight, perhaps very much more. "Supply and 

 demand," say the packers and practical economists, with unction. 

 But at that very time every one may know that the potential supply 

 in the country is very small, and the potential demand is very 

 great. At that very time this wider situation may be taken fully 

 into account by the packers in the prices which they are charging 

 for their products to the retailers. The hog market may have 

 broken 15 to 20 cents, but the lard, ham and bacon markets may 

 have held steady or even advanced. 



The packers, in the prices which they pay for live hogs and the 

 prices which they charge for hog products, are governed chiefly 

 by strategic considerations. Day by day they change their prices 

 to meet the surface indications of changing supply and demand 

 conditions. They may sometimes exercise such poor strategy that 

 they will be compelled to manufacture hog products at a loss for a 

 time. The prime consideration is to buy as cheaply as possible 

 and to sell as high as possible and yet meet the competition, which 

 is rather more active than many farmers have supposed. 



Now it is obvious that a ratio system of hog prices is not com- 

 patible with the system employed by the packers, or by any typical 

 business man, for that matter. Big business enjoys a speculative 

 profit which comes with fluctuating prices. But a daily fluctuat- 

 ing price is not consistent with the idea of a just price or a cost-of- 



