434 



AGRICULTURAL ECONOMICS 



FIG. 7 



The situation is otherwise where there are permanent causes of 

 difference between producers. Then cost at the hands of the mar- 

 ginal producer does settle the long-run price. The point about which 

 oscillations range, and to which price tends to conform, is cost for 

 the least advantageous producer. Without him, the total supply 

 cannot be enlarged to the point at which there is an equilibrium of 

 normal supply and demand. If there were no limit to the amount 

 which the more advantageous producers could bring to market if 



this fortunate set of producers could 

 increase the output indefinitely at 

 constant cost the marginal producer 

 would be driven out and the condi- 

 tions would be those of constant cost. 

 There being such a limit, he must be 

 called on for the maintenance of 

 supply, and there must be in the 

 long run a price which will make it 

 worth his while to contribute. Value 

 is then determined in the long run 

 by cost to the marginal producer; 



but at what point in the varying scale of costs that producer will 

 be, depends on the conditions of demand. 



III. We turn now to the reverse conditions, those of diminishing 

 cost or increasing returns. Suppose that, as additional supplies of a 

 commodity are produced, the cost of each unit becomes, not greater, 

 but less. Such a tendency is represented in Fig. 7, where the line 

 SS f , indicating the conditions of supply, has a downward slope. The 

 line DD', representing the conditions of demand, necessarily has a 

 downward slope, indicating the diminishing utility of successive 

 increments. Equilibrium will be reached at the point where the two 

 curves meet, at P'. At that point the quantity brought to market 

 sells at the price BP', which equals its cost of production. The total 

 quantity put on the market will normally be OB, and its total selling 

 price will be OPP'B. 



It is to be observed that this figure represents a situation different 

 in essential respects from that represented in Fig. 6 in the preceding 

 discussion. In that case some among the competing producers were 

 supposed to contribute to the supply at less cost than others. They 

 reaped a producer's surplus. In the present case, however, all pro- 

 ducers are on the same plane; all have the advantage of lessening cost 



