Custom production, theory and practice: With special emphasis on the goals and pricing procedures of the contract construction industry

This study was undertaken in an attempt to develop economic concepts of price-output determination which can be applied to firms producing goods on custom order. Economics has long concentrated on firms producing a stream of goods for market, with some planned excess of production over demand being inventoried. This method of production allows for rather easy application of the rules of marginal analysis. On the other hand, economics does not have an existing body of theory dealing with the actions of firms producing goods on custom order, even though it accounts for a large share of the total output of the American economy. The goals and pricing policies of these firms have not been studied for the purpose of integrating their actions into the existing theory of the firm. Current theory assumes production of atomistic units of output, the level of which can be adjusted over wide limits in the short run and adjusted over even wider limits in the long run. This theory of the firm predicts the level of output which the firms will produce, but it does not discuss the method by which a custom producer arrives at the bid price for a home or factory—rather it prescribes the manner by which cost influences output. This study is concerned with the goas and pricing practices of construction firms. For purposes of analysis, it ia hypothesised that construction firms are profit maximizers and that they use marginal techniques in pricing output. In addition to testing this hypothesis, analysis of the factors affecting the determination of a price policy and the factors affecting bidding decisions will be made.