unresolved What is the difference between the following equations, and which one is correct?
- Net income =
- Net income =
- Net income =
unresolved Does short-term supply price = marginal prime cost?
The concepts of user cost and of supplementary cost also enable us to establish a clearer relationship between long-period supply price and short-period supply price. Long-period cost must obviously include an amount to cover the basic supplementary cost as well as the expected prime cost appropriately averaged over the life of the equipment. That is to say, the long-period cost of the output is equal to the expected sum of the prime cost and the supplementary cost; and, furthermore, in order to yield a normal profit, the long-period supply price must exceed the long-period cost thus calculated by an amount determined by the current rate of interest on loans of comparable term and risk, reckoned as a percentage of the cost of the equipment. Or if we prefer to take a standard ‘pure’ rate of interest, we must include in the long-period cost a third term which we might call the risk-cost to cover the unknown possibilities of the actual yield differing from the expected yield. Thus the long-period supply price is equal to the sum of the prime cost, the supplementary cost, the risk cost and the interest cost, into which several components it can be analysed. The short-period supply price, on the other hand, is equal to the marginal prime cost. The entrepreneur must, therefore, expect, when he buys or constructs his equipment, to cover his supplementary cost, his risk cost and his interest cost out of the excess of the marginal value of the prime cost over its average value; so that in long-period equilibrium the excess of the marginal prime cost over the average prime cost is equal to the sum of the supplementary, risk and interest costs.