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From:
[log in to unmask] (Massimo Salzano)
Date:
Fri Mar 31 17:18:50 2006
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A good reference could be: http://www.econlib.org/library/Essays/JPE/knCPP1.html  
Knight, Frank H. (1885-1972)  
"Cost of Production and Price Over Long and Short Periods"  
Journal of Political Economy, vol. 29, no. 4, April 1921, pp. 304-335.  
See expecially the graphs and the passage:  
"From this point of view it is obvious that the costs which influence supply and  
price are the money outlays necessary to production. Ultimately these are the  
payments for the use of productive resources. We shall neglect the effects of  
taxation. We have no concern with the pains or subjective sacrifices involved in  
production, since it is not at all in terms of such "costs" that the  
entrepreneur makes his calculations on the basis of which he decides whether to  
produce the good or on what scale. He takes account of sentimental costs only in  
so far as they influence the outlays he must make to secure the services  
necessary to production. That is, he is concerned only with the price measure of  
his costs. Their magnitude in some other aspect will not influence his decision.  
Pains and sentimental repugnances are undoubtedly influences in limiting the  
supply of some sorts of services and raising their price, but in the aggregate  
they form a relatively unimportant element, and no one now contends that there  
is any tendency for the prices of productive services, still less of final  
goods, to bear any correspondence with these magnitudes. The relation between  
them is a separate inquiry, pertinent perhaps to an evaluation or criticism of  
the competitive economic order, hardly so to an explanation of its workings. ....  
Under these conditions the supply curve is identical with a cost-of-production  
curve. The supply is a function of price because the cost of production per unit  
is a function of the supply, the amount produced. It follows at once from the  
relation between cost of production and price (see above, p. 313) that the  
amount which will be produced at any selling price (per unit) is the amount  
which can be produced at that cost per unit. That is, the same curve which shows  
output as a function of price shows cost as a function of output. In order to  
discuss the relations from the producer's point of view it is therefore  
advisable to reverse the axes of the diagram, treating supply as the independent  
variable and cost and selling price as functions of supply. This gives the same  
curves as before, but as seen in a mirror or looking through the paper from the  
back. (It is also evident that the demand curve may be regarded indifferently as  
showing selling price as a function of supply or the amount salable as a  
function of price, that these are two ways of looking at the same set of facts.)  
On the new diagram (IV), which represents a mirror image of Diagram III, the  
intersection of the curves shows in the more natural graphic way the equality  
between cost and selling price, which is the goal of producers' adjustments,  
though on either diagram, according to the direction in which it is read, it  
shows either equality of cost and selling price or equality of production and  
consumption."  
  
Massimo Salzano  
 

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