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Case Study
1) The prime cost is explained by Smith as being the natural price minus any profits that
were made from selling the good. In this way, the prime cost is the pure cost of the good
to produce and it does not include the profits for the producer. For example, if it costs
someone $5 to make a widget, but it is sold at $10, then the natural price would be $10
and the prime cost would be the $5 required to produce it.
2) An increase in demand in an industry allows producers for a good to achieve supernormal
profits, hence they have an incentive to keep this information hidden from other
entrepreneurs. Smith explains that an increase of demand would increase the price
(which it does) above the natural price, however, if supply were also to be increased the
price would return back to its natural price. This is why Smith says that producers wish to
conceal the information, as the lack of barriers in perfect competition makes it easy for
rivals to increase the supply of a good and hence decrease the price and supernormal
profits. This is why the long-run equilibrium for firms is a zero economic profit as the
information eventually is spread and the...