Inevitable loss;

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VOL. III NEW YORK, DECEMBER 15, 1920 No. 12
The Inevitable Loss
PRICES, according to economic lore,
are fixed by demand and supply.
Under conditions of free competition, an
increase in demand for a commodity, with­out
a corresponding increase in supply,
causes the price to move upward. On the
contrary, any falling off in demand, unless
accompanied by a decrease in supply,
tends to result in a reduction of the price.
In discussions of cost accounting, the
assertion is frequently made that prices
are fixed by adding to cost a percentage
for profit; an assertion which by itself
seems entirely logical. A question as to
the accuracy of the statement arises, how­ever,
when an effort is made to reconcile
it with the economic law previously stated.
The conflict seems to center around the
use of the word "fix." To "fix" a price in
the sense of regulating or controlling it is
one thing. To "fix" a price in so far as
setting or announcing it is understood,
is an entirely different matter. The
economist uses the word in the first sense;
the cost accountant in the second.
The producer may set the price on his
goods. If he is possessed of any business
judgment whatsoever he will be governed
by the market conditions and guided by
the market price. Hence, it will be seen
that the regulation of prices is not in the
hands of any individual producer but is
regulated by the forces of demand and
supply.
It is interesting, therefore, to see
what effect the present falling market will
have on the individual producer. -First, he
will be forced to take less for his goods.
His margin of profit will be first attacked.
As the price falls his margin of profit will be
gradually reduced until cost is reached.
If the decline continues below that point
he will sustain an actual loss instead of a
reduction in, or failure to realize at all, an
anticipated profit. As the price recedes
below the point of cost, the loss increases.
It is of course superfluous to say that no
merchant relishes having to sell goods at a
loss. On the other hand he is, on a long
continued falling market, practically es­topped
from resorting to the alternative
of withdrawing and withholding his goods.
If he ceases to sell, his direct or trading
loss will stop, but his overhead will develop
into an indirect loss which will cause him
at least to disorganize if he does not
liquidate. Liquidation holds no better
hope for him than continuing to sell at a
loss as long as the market is falling. He is
forced to go on if he is to continue his
economic existence.
Tracing back to the cause of his loss it is
apparent that the combined cost of his
materials, labor, and overhead is more than
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