Let us briefly consider the market price for pota toes. They are an agricultural product that tends to increase in cost when any increase in supply is called for If they are selling at $1 a bushel, therd are certain grades of land on which farmers will pro duce potatoes, but no farmer will willingly produce them on land where their cost exceeds $1 unless he has good reason for believing that the price in the following winter will be much higher. In normal times most staple articles like potatoes, pork, corn and beef, have a normal or customary price, producers having learned by experience to make a pretty ac curate forecast of the demand: and the one thing they are most anxious about is that the supply of any article shall not be so great that its price must fall below the cost of production ; in other words, that its marginal utility shall not be less than its cost.
Hence wise producers are slow to increase their output of any article unless there is evidently an in crease in the demand for it ; or, in other words, unless there has been a rise in its marginal utility sufficient to counterbalance any increase in the cost of produc tion.
Practically, of course, any increase in the marginal utility of an article finds expression in a rise of the market price; and when that rises above the cost of producing any portion of the existing supply produc ers begin to plan larger production even tho their costs increase.
So as a result of our examination of value from two points of view, the consumer's and the producer's, we may say that it is such a ratio of exchange as tends to make the marginal utility of a good just compen sate for its marginal cost. When a good exchanges on such a basis it is said to possess normal value.' When any good sells much above its normal value, we must find the cause in abnormal conditions, such as war, monopoly, or some freakish change in demand.
11. Producer's surplus or differential gain.—
Producers who enjoy special advantages evidently inake a bigger profit than those on the margin of production, whose costs are the highest. If a manu facturer produces an article which commonly sells at $2, at a cost of 50 cents he is evidently making a profit of $1.50 on each article. But if other manufacturers have costs close to $2 their profits are barely sufficient to enable them to continue production.
That part of any producer's profit which is in ex cess of his cost of production plus a reasonable profit, is called by. economists the producer's surplus or dif ferential gain. It is due to the differences between his advantages and tbose enjoyed by competitors who are working at the greatest disadvantage. As we shall see later, the rent of land has its origin in the producer's surplus.
Some readers may be disposed to question the as sertion that value is determined by unconscious com petition among marginal consumers and producers. It may seem to them that the highly favored pro ducer, the one with low costs, will be quite ready to accept a low price provided by so doing Ile can quickly market his product. Or it may seem that the impa tient consumer with plenty of money in his pocket will promptly pay almost any high price that is asked, and that neither buyers nor sellers will wait for the outcome of the conflict between the marginal con sumer and the marginal producer.
This view is entirely erroneous because it ignores three important facts : first, that most men like to sell their services and the products of their labor at the best price they can get ; second, that most men like to gratify their wants with the least expenditure of money or effort ; and, third, that market prices are determined, not by the actual producers and con sumers, but by professional traders who represent them. The. trader's important wOrk we shall discuss in the next chapter.