i 9 2 THE MARKETING OF WHOLE MILK 



the various costs would at once leave half of the producers 

 "out in the cold/* since half of them would be producing 

 at a cost higher than the average and would be compelled 

 to quit the business if prices were established at that 

 figure. 



It is often said that over a considerable period of time 

 the price of a commodity will tend to equal its marginal 

 cost of production, /. e. y the cost of the most expensive 

 portion of the supply. This is undoubtedly true. But to 

 say that price tends to equal marginal cost is not neces- 

 sarily to say that marginal cost tends to determine price. 

 Price itself may have much to do with the determination 

 of this marginal cost, since any producers having higher 

 costs will be eliminated because consumers are unwilling 

 to pay a price sufficient to keep them in the game. In 

 other words, we are not sure as to which blade of the shears 

 is doing the cutting. 1 



Suppose, for example, that producers A, B, C, D, and E 

 are producing milk at costs of $3.00, $2.90, $2.80, $2.70, 

 and $2.60 per hundredweight respectively. With the 

 price at $3.00 A is just able to continue production, and 

 the others make some profit. Farmers X, Y, and Z, let 

 us suppose, have tried to produce and have found that 

 their costs were $3.30, $3.20, and $3.10 respectively. 

 Being unable to produce cheaply enough, they have 

 dropped out. A's cost is, therefore, the marginal cost but 

 can hardly be said to have determined price. A decrease 

 in demand might have made B's cost the marginal one. 

 In the long run price must, of course, cover cost of pro- 

 duction of the most expensive portion of the total product 

 which society is willing to continue to purchase. 



It is incorrect, however, to think that the most expen- 



1 See Alfred Marshall, Principles of Economics, Sixth Ed., p. 348. 



