Question

How is normal price determined under laws of returns?

Answer 1

Normal prices are decided over time, when both demand and supply have fully adjusted and enterprises have the ability to shift production scales. The laws of returns, namely the Laws of Increasing Returns, Constant Returns, and Diminishing Returns, play an important role in determining how supply responds when output varies. This, in turn, influences the regular price.

1. Under Law of Increasing Returns: When a firm’s returns increase, output grows faster than input. As output increases, the average cost decreases. As a result, businesses can produce more at a reduced cost, and the average price reduces.
   Example: In industries like electronics or software, larger-scale production reduces costs, making goods cheaper over time.
2. Under the Law of Constant Returns: Here, output increases proportionately with input, and average cost remains constant. Supply increases at a constant cost, and therefore, the normal price remains stable in the long run.
   Example: In some standard manufacturing processes, increasing production neither lowers nor raises the average cost significantly.
3. Under the Law of Diminishing Returns: When diminishing returns apply, output grows less than equally to input. As production increases, the average cost rises, making it more expensive to create more units. This leads in a higher average price, and hence the typical price tends to grow under this law.
   Example: In agriculture, after a certain point, adding more labor or fertilizer to the same land leads to smaller increases in output, raising the cost per unit and the selling price.