ABSTRACT
Let us begin by recalling that our criterion of efficient adjustment -the equality between the price of a good and its CMI-is ambiguous. In our discussion of centrally planned allocation we found it necessary to distinguish between different kinds of adjustment, each corresponding to different periods of time. Long-run adjustment relates to the quantity of capacity-plant, buildings, skilled men, etc.-which is appropriate to a particular demand. Short-run adjustment has to do with the appropriate utilization of this capacity, i.e. with the amount of output which at any particular time the capacity should be employed to produce. When both capacity and the current rate of output are given, there remains the question-hitherto ignored-of how much output should be sold and how much added to stocks. All of these three allocative problems relate to the adjustment of supply to demand, but they each refer to a different kind of adjustment and a different period of time. A valid criterion of efficiency, in each case, is that the market price
of the commodity should be equal to the cost of the requiredmarginal inputs, where this is measured in a way appropriate to the circumstances. In considering the optimum investment in capacity, it is the cost of all the inputs applied, whether embodied in fixed equipment or used in co-operation with it, that is relevant. It is necessary that the average price which the commodity will fetch, over the life of the equipment, should be equal to the cost of all the additional resources required to produce a unit increase in output capacity. If we assume that all scale economies have been exhausted, so that unit costs do not vary with output and are equal to CMI, we can say that the price of the commodity should equal its unit cost of production, costs being taken to include the minimum profit normally necessary to induce entrepreneurs to invest.
