Chapter 64 Appendix VIII Limitations of the Application of the Static Assumption of Increasing Returns

The strict supply-schedule assumptions of Section 1 lead to the possibility of multiple equilibria (stable and unstable) positions.But this assumption, so far as increasing returns is concerned, is so far removed from reality that it can only be used tentatively within narrow limits.Care must therefore be taken when using the term normal supply price. We have already hinted at the difficulties encountered by the equilibrium theory of goods which obey the law of increasing returns.These hints now need to be further developed. The point is that the term "margin of production" is meaningless in the long run for those quotients whose production costs decrease as output gradually increases.And the tendency to increasing returns generally does not exist in the short run; therefore, the word "marginal" should be avoided when we discuss the special conditions of the value of those commodities subject to the tendency of increasing returns.So far as transient fluctuations in demand are concerned, it applies, of course, to these commodities as to all others; for the production of those and other commodities which accommodate these fluctuations obeys the law of diminishing rather than increasing returns.However, in those problems in which the tendency of increasing returns is effective, no clear definition of the marginal product can be given.In these matters, we have to choose larger units, and we must consider the situation of "representative" enterprises rather than some individual enterprises.In particular we must take into account the cost of the entire production process, without dividing the cost of individual commodities, such as a rifle or a yard of cloth.Indeed, if a branch of industry is almost entirely in the hands of a few large firms, none of them can be called "representative".If these enterprises are merged into one trust, or even closely associated with each other, the term "normal production cost" has no precise meaning.As will be amply demonstrated in the next book, on the face of it it must be regarded as a monopoly; The early tenth century showed that, even in this case, competition still played a much greater role, and the use of the word "normal" was less inappropriate than it might have seemed at first.

Before the second quarter. Let us return to the example that the increased demand for aneroid gauges caused by the movement of fashion soon afterward led to an improved organization and lowered the supply price.When at last the power of fashion wears off, the demand for barometers is again based only on their actual utility; and this price may be greater or less than the normal demand price for the corresponding scale of production.In the former case capital and labor were wary of the business, and of those established enterprises some might continue to operate, though at a lower net profit than they had hoped; Relatively prosperous similar production sector.As old factories decline, new factories start up and there are few replacements, and the scale of production is also reduced; the old equilibrium position may appear to be quite stable and not easily destroyed.

But now let us consider another case in which the long-run supply price of the increased output has fallen so far that the demand price remains above it.Under such circumstances, the entrepreneur looks ahead to the life of a particular plant engaged in the business, considers its chances of success and failure, discounts its future expenditures against its future revenues, and concludes, perhaps, that revenues greatly exceed expenditures.Capital and labor flow rapidly into the industry; and production increases perhaps tenfold before the fall in the demanded price equals the fall in the long-run supply price, and a stable equilibrium position is found.

For although in showing supply and demand oscillating around an equilibrium position in Chapter 3, we implied that there can only be one stable equilibrium position within a market, as is commonly implied, in practice there are certain conceivable , Although in extremely rare cases, there can be two or more real equilibrium positions of supply and demand, any of which is also consistent with the general situation of the market, and once any of them is established, until a certain large Disturbances appear and will be stable. The third section continues. It must be admitted, however, that this theory is out of touch with real life, so long as it assumes that if the normal production of a commodity increases and then decreases to its original output, the demand and supply prices return to their original values. The original position on the output.

Regardless of whether a certain commodity obeys the law of diminishing returns or the law of increasing returns, a decline in prices can only gradually increase consumption.In addition, once the habit of using a certain commodity is formed when its price is low, it cannot be quickly given up when its price rises again.If, therefore, after the supply had gradually increased, some source of it were clogged, or any other cause arose, so that the commodity became scarce, many consumers would be reluctant to give up their old habits.The price of cotton, for example, was high in the time of the war in the United States, and it might not have been so high had the previous low price not brought it into common use in satisfying the wants which the low price created.Hence the list of demand prices which is valid for the forward movement of the production of a commodity will seldom hold true for its backward movement, but will generally need to be raised.

Moreover, the supply-price schedule may well represent the actual fall in the supply-prices of commodities which occur when the supply is increasing; but if the demand falls, or if for any other reason the supply must fall, the supply-prices will not go back in their tracks, Instead, the lower path will be taken. The supply price schedule valid for forward motion is not valid for backward motion and must be replaced by a lower supply price schedule.This is true whether commodity production is governed by the law of diminishing or increasing returns.But it is of special importance in the case of increasing returns, since the fact that production obeys this law proves that its increase leads to a great improvement in organization.

For these economies are not easily lost when any accidental disturbance has brought about a great increase in the production of a commodity, thereby leading to the introduction of large economies.The development of mechanical tools, the division of labor and communications, and improvements in organization of every kind, once employed, are not easily abandoned.Once capital and labor are engaged in a specific industrial sector, if the demand for the commodities they produce minus the first intersection point we get from left to right, it can be a stable equilibrium point or an unstable equilibrium point.In the case of an unstable equilibrium, this would indicate that small-scale production of the commodity in question would be unprofitable to the producer; therefore, unless a momentary event temporarily creates an urgent need for the commodity, or temporarily reduces the cost of its production , or a high-flying factory is prepared to use a large capital to overcome the initial difficulties in production, and to produce the commodity at a price that will guarantee a huge sales volume, it will never start to produce it.

but they cannot be turned quickly to other employments; and their competition will for a short time prevent the diminished demand from raising the price of commodities. Partly for this reason, there are few occasions where two stable equilibrium positions coexist as possible alternatives, even if the businessmen involved are able to ascertain the full truth about the market.But when a branch of industry is in such a situation that if there is some great increase in the scale of production, the supply price falls rapidly, then the brief disturbance which causes the demand for the commodity to increase may stabilize the equilibrium price. Thereafter, a commodity produced in much greater quantities is sold at a much lower price than before.This is always possible if we push the tables of supply and demand prices far back and find them very close together.For if the supply price of those surges is slightly above the corresponding demand price, a modest increase in demand, or a slightly new invention, or some other method of making production cheap, can bring supply and demand prices to meet and create a new equilibrium.This movement is in some respects similar to a movement from one stable equilibrium position to another, but differs from the latter in that it is cannot appear.

The above-mentioned unsatisfactory results are partly due to the fact that we have not yet perfected the method of analysis, and its reduction in the future is conceivable due to the gradual improvement of our scientific machinery. If we can represent the normal demand price and the normal supply price as functions of the normal quantity of production and the time at which that quantity becomes normal, we will go a long way. The fourth quarter continues. Second, let's reiterate the difference between average value and normal value.In statics, since the revenue to each instrument of production can be accurately estimated in advance, it is the normal measure of the labor and sacrifice required to bring that instrument into being.

The total cost of production is obtained by multiplying the marginal cost by the unit quantity of the commodity, or by adding up the actual production costs of the various parts of the commodity, plus the total rent from the differential advantage in production. The total cost of production being determined by these methods, the average cost is equal to the total cost of production divided by the quantity of commodities; the result is the normal supply price in the long or short run. In the real world, however, the term "average" cost of production is somewhat confusing, since most of the means of production (both material and human) to make a good have long existed.Their value, therefore, is not likely to be exactly what the producer originally expected.Some of them are of greater value and some are of lesser value.The income they now earn is determined by the general supply and demand of their produce; their value is the capital reduction of these incomes.Therefore, when we make the normal supply price list, it is connected with the normal demand price list to determine the equilibrium position of the normal value. If we think that the value of these production tools has been fixed, we have to fall into the theory of circulation.

This vigilance is especially important in those industries where there is a tendency towards increasing returns.It can be emphasized by diagrams of supply and demand which are possible in statics, and only in statics.There, each particular item bears its fair share of the general cost; the producer may not be worth accepting a particular order at a price other than the total cost (which includes the business dealings and remuneration of outside organizations to set up a typical plant) of.This diagram has no positive value, it merely guards against possible errors in abstract reasoning.