III One-firm Industries

§ 14. Let us now revert to the laws of supply price in relation to an industry of one firm only. Here the equilibrium firm and the industry as a whole become identical, so that there is no need to employ a function of two variables. Moreover, marginal cost is no longer ambiguous: it must signify marginal additive cost, since there is no such thing as marginal substitute cost. If we were to follow blindly the lead of the preceding discussion, we should conclude that equilibrium requires that This would mean that there can only be a supply price in respect of one, or, if the curves of marginal cost and of average cost cross one another several times, in respect of a few isolated quantities of output, unless the industry conforms to conditions of constant supply price. Only then, it would seem, is the existence of a continuous supply schedule of the ordinary type possible. It is not difficult to see, however, that the foundation of this argument is unsound. For the equilibrium firm of a many-firm industry it is true that equilibrium is only attainable if both its average cost and its marginal cost are equal to the supply price of the industry. But for the equilibrium firm of a one-firm industry that is not true. There can, indeed, be no equilibrium if the average cost is greater than the supply price and the industry is selling at the supply price; for, in such conditions, there will be a tendency to contraction. Likewise there can be no equilibrium if the marginal cost is greater than the supply price and the industry is selling at the supply price; for here, again, there will be a tendency to contraction. But, since we have to do with one firm only, equilibrium does not necessarily forbid average cost to be less than the supply price. Again, if, where average cost is equal to the supply price, marginal cost is less than this, and the industry is selling at the supply price, there is no tendency for output to expand, since any expansion would necessarily involve a loss, and, therefore, equilibrium is not incompatible with this arrangement. Hence we conclude that in a one-firm industry the supply price of any given quantity of output is equal to average cost or to marginal cost, according as the one or the other of these is the greater. So far as formal considerations go, the industry is free to conform to decreasing, constant or increasing (money) supply price. If it conforms to decreasing supply price throughout, the supply curve is coincident with the curve of average cost: if it conforms to increasing supply price throughout, with the curve of marginal cost: if it conforms to constant supply price throughout, with both these curves. If it conforms to conditions of increasing supply price in respect of some outputs, and of decreasing supply price in respect of other outputs, the supply curve lies along the curve of average cost where this is higher than the curve of marginal cost, and along the curve of marginal cost where that is the higher of the two.