ABSTRACT

UNTIL now, we have followed the economist’s traditional approach and regarded marginal cost as the relevant cost concept, which serves as the basis of the producer’s market policy. The concept of marginal cost, however, is the economist’s invention; and businessmen are usually ignorant of it. They generally regard average variable cost as the basis for their market behavior. This fact has led some economists to accuse businessmen of irrational behavior; but simpler and more correct interpretations of it are (1) that the practical difficulties of calculating marginal cost may be insurmountable; (2) that average variable cost is in many cases a good approximation to marginal cost; and (3) that in some instances average variable cost, although different from marginal cost, may nevertheless properly be used as the basis for the firm’s price policy. We shall see in section 2 of this chapter that there is need for all three interpretations.