Front Page Titles (by Subject) II - Cost of Production and Price Over Long and Short Periods
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II - Frank H. Knight, “Cost of Production and Price Over Long and Short Periods” 
Journal of Political Economy, April 1921, xxix, no. 4, pp. 304-335.
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The second stage of the explanation deals with the production period for the good. From this point of view the supply is fixed and is on the market without reserve. The data are not sharply definable, but in general there is a fairly definite period within which supply is fixed. The situation is clear enough in the case of an agricultural product such as corn or wheat. Taking the season as a whole there is no possibility of a change in the supply between the time when final commitments are made for one season's crop and the time when the next crop becomes available. The growers may indeed market less of the crop, using more themselves, if the price is low, but if so3 the fact is exactly like increased consumption by non-producers under the same circumstances. If the demand of the producers themselves is taken into account at all it should be regarded as demand and added in with the demand of non-producers, and not treated as a deduction from supply. In this case the suggestion made by Davenport4 seems to be by far the most realistic manner of viewing the situation. The demand from the standpoint of the production period as a whole is the consumer's demand and is a decreasing function of price, represented by the same sort of curve as in the former case. The supply curve (again taking price as the independent variable) is a horizontal straight line (see Diagram II). The theoretical price is the marginal demand price of the existing supply, the highest price at which it will all be consumed within the period before new supply becomes available.
Even in the case of wheat some qualification of this formulation is necessary. Some wheat is carried over from one production period to another and variations in this amount with anticipated changes in conditions in the next period may be appreciable. And the facts are somewhat complicated from the standpoint of any one country by the fact that the market is international. But from the standpoint of the world market as a whole the description is a fair approximation to the facts.
With respect to manufactured goods more serious reservations must be made. The production period is less definite and the amount of carrying over from one production period to another is much more important. For extreme price changes the supply, meaning the amount produced, is more flexible over short periods of time and anticipated changes in the conditions of production make themselves felt more quickly by affecting the rate at which existing stocks are thrown on the market. If prices promise to be higher, middlemen hold back supply, raising prices before the new conditions actually become effective, and if they promise to be lower, stocks are reduced below the normal levels, reducing prices.
These two cases, the situation at a moment and over that more or less definite production period within which supply is not subject to change, are thrown together in the conventional treatment of market price. It seems to the writer absolutely necessary for clearness to separate them. In neither, it is obvious, do conditions of production affect price. For a given supply once produced, the price which competition tends to establish is determined by demand alone. The costs of production are ancient history. The producer will get as much as he can, whether it is more or less than his costs. The tendency is to establish over the production period the highest uniform price at which the supply will be consumed and momentary price fluctuates around this level in response to the speculative estimates of traders.
[3.]Moreover the fact itself is improbable. If the wheat is the grower's main source of income, it is at least as likely that he will consume more if the price is high, since the difference in his income due to the higher price of his produce is likely to be more important than the difference in the price as a deterrent to consumption.
[4.]Economics of Enterprise, pp. 48-52.