Routledge Revivals: Studies in Economic Dynamics (1943)

M. Kalecki

• Publisher: Routledge
• Year: 2017
• Topic: Business
• eBook ISBN:
  9781351662031
• Subtopic: Business General
• Index: Business

First published in 1943, this work contains five interconnected essays presenting the author's renowned additions to the business cycle theory.

Written by one of the most distinguished economists of the 20th century, this work will be essential reading for students and scholars of the history of economic thought, monetary theory and macroeconomics.

Part One
Prices, Interest, and Profits

1.
Costs and Prices

The Percentage Gross Margins and Monopolistic Competition

1. The purpose of this essay is to discuss the relation between prime costs and prices of an industry under conditions of market imperfection and oligopoly. By an “industry” is meant here manufacturing and selling of a certain group of products which fulfils the following conditions: (i) The price fixing for a product by a firm is influenced mainly by the prices of other products in the group and the expected price reactions of firms manufacturing them, and only to a much lesser degree by prices and price reactions outside the group. (ii) The proportionate changes of the unit prime costs (unit costs of materials and wages) of the various products of an “industry” are not very divergent.

It is obvious that this definition is not clear cut. The broader the group the better condition (i) is fulfilled, and the worse in general condition (ii). The group must thus be formed so as to achieve a compromise between these two requirements and therefore the scope of the industry is within certain limits arbitrary.

Before proceeding with our discussion we shall make certain assumptions as to the average prime costs of the products in question. We assume that—as is usually the case in manufacturing—the average prime cost changes little as output expands, and that the entrepreneur takes the average prime costs as a crude approximation to the marginal costs. The latter seems to be borne out by recent inquiries which showed that entrepreneurs are really not familiar with the exact concept of marginal cost. In what follows we shall assume for the sake of simplicity that the average prime cost a_k of any product is strictly constant when output fluctuates. The marginal cost is equal to a_k and thus also constant until the firm reaches its maximum capacity. At this point the marginal cost has no definite value and the price of the product is determined by the condition that output cannot be increased.

2. Imagine that in an industry a short-period equilibrium of the price system has been reached, and that no firm works up to capacity. The average prime costs of the relevant products are a₁, a₂ … a_n. The firms fix the prices of their products, taking into consideration the mobility of customers (market imperfection) and the influence of their own prices on those of their rivals (oligopoly). Each firm is satisfied that the price p_k fixed is more advantageous than a higher or a lower level.

Imagine now that a fall in material prices and wage costs reduces all average prime costs a₁, a₂ … a_n in the same proportion. It will be seen that this creates for entrepreneurs an inducement to cut their prices. For the fall of average costs a₁, a₂ … a_n with unchanged prices p₁, p₂ … p_n increases the profit + overheads margins p_k − a_k (we shall call them gross margins) in relation to prices p_k, and thus a cut of the price p_k by a certain percentage means a smaller percentage cut of p_k − a_k than in the initial position. Consequently, if the firms stick to their previous views about what are the expected percentage increases in their sales caused by a percentage cut in prices, they must consider it profitable to reduce them. Now as long as $\frac{p_k-a_k}{p_k}$ remain greater than in the initial position the price fall goes on. For p_k − a_k is then less affected by a given percentage cut in prices than in the initial position and, consequently, the state of affairs is more favourable for price cutting than it was before the fall of average prime costs. The price system returns to equilibrium when prices have fallen in the same proportion as average prime costs because at this point $\frac{p_k-a_k}{p_k}$ reach their initial level.¹

It has been assumed throughout that the conditions of market imperfection and oligopoly were unchanged. This may, however, not be the case. Indeed, if, for instance, the market imperfection is due to transport costs and these remain unaltered while prime (production) costs decline, the fall in prices in relation to transport costs increases market imperfection. As a result prices will fall here less than proportionately to prime costs. For if they did fall proportionately to prime costs a given percentage rise in prices would increase the gross margin p_k − a_k by the same percentage as in the initial position, while the expected fall in firms’ sales would be smaller; consequently the firms would consider it profitable to raise prices. Thus the increased market imperfection caused by the rise in the relation of transport costs to prime costs is here reflected in the increase of percentage gross margins $\frac{p_k-a_k}{p_k}$.

3. It follows from the above argument that with a given relation of ave...

Table of contents

• Cover
• Title
• Copyright
• Original Title
• Original Copyright
• Foreword
• Contents
• PART ONE Prices, Interest, and Profits
• PART TWO Business Cycle and Trend