68 THE GENERAL THEORY OF EMPLOYMENT BK. II

The concepts of user cost and of supplementary cost alsoenable us to establish a clearer relationship between long-periodsupply price and short-period supply price. Long-period costmust obviously include an amount to cover the basic supple-mentary cost as well as the expected prime cost appropriatelyaveraged over the life of the equipment. That is to say, thelong-period cost of the output is equal to the expected sum ofthe prime cost and the supplementary cost; and, furthermore,in order to yield a normal profit, the long-period supply pricemust exceed the long-period cost thus calculated by an amountdetermined by the current rate of interest on loans of comparableterm and risk, reckoned as a percentage of the cost of the equip-ment. Or if we prefer to take a standard “pure” rate of interest,we must include in the long-period cost a third term which wemight call the risk-cost to cover the unknown possibilities of theactual yield differing from the expected yield. Thus the long-period supply price is equal to the sum of the prime cost, thesupplementary cost, the risk cost and the interest cost, intowhich several components it can be analysed. The short-period supply price, on the other hand, is equal to the marginalprime cost. The entrepreneur must, therefore, expect, whenhe buys or constructs his equipment, to cover his supplementarycost, his risk cost and his interest cost out of the excess of themarginal value of the prime cost over its average value; so thatin long-period equilibrium the excess of the marginal prime costover the average prime cost is equal to the sum of the supple-mentary, risk and interest costs.1

The level of output, at which marginal prime cost is exactlyequal to the sum of the average prime and supplementary costs,has a special importance, because it is the point at which theentrepreneur’s trading account breaks even. It corresponds,

1 This way of putting it depends on the convenient assumption that themarginal prime cost curve is continuous throughout its length for changesin output. In fact, this assumption is often unrealistic, and there may beone or more points of discontinuity, especially when we reach an outputcorresponding to the technical full capacity of the equipment. In this casethe marginal analysis partially breaks down; and the price may exceed themarginal prime cost, where the latter is reckoned in respect of a small decreaseof output. (Similarly there may often be a discontinuity in the downwarddirection, i.e. for a reduction in output below a certain point). This is im-portant when we are considering the short-period supply price in long-period equilibrium, since in that case any discontinuities, which may existcorresponding to a point of technical full capacity, must be supposed to bein operation. Thus the short-period supply price in long-period equilibriummay have to exceed the marginal prime cost (reckoned in terms of a smalldecrease of output).