The Wool Merchant's Ledger: Pricing Cloth in a Shrinking Market
It is 1490 in Bruges. A Flemish wool merchant, Jan van der Beurse, has 400 bolts of finished broadcloth in his warehouse. His fixed costs (workshop rent, tools, and the wages already paid to weavers) total 1,200 guilders. Each bolt cost him 3 guilders in raw wool and dye, for a total variable outlay of 1,200 guilders. English merchants have begun shipping cheaper cloth into the Low Countries, and the market price for broadcloth has fallen to 5 guilders per bolt. Jan's factor in Antwerp reports that demand at 5 guilders is steady but will not rise. Jan's creditor demands payment of 900 guilders within the month. Jan considers holding all 400 bolts off the market until prices recover, or selling at the current price.
1. Using the cost figures, determine whether Jan should sell at 5 guilders or withhold the cloth, and explain the economic reasoning a Renaissance merchant might not have articulated but that the situation implies.
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Sell, and sell now. Compare the marginal decision, not the sunk cost.
- Total cost already committed: 1,200 (fixed) + 1,200 (variable) = 2,400 guilders.
- Revenue if all 400 bolts sell at 5: 2,000 guilders.
- That is a book loss of 400 guilders - which tempts Jan to wait.
But the 2,400 is largely sunk: the wool is bought and the weavers paid. The real question is what each additional bolt sold returns against what holding it costs.
- Each bolt fetches 5 guilders against a recoverable cost of essentially zero (the cloth exists). Selling generates 5 guilders of cash per bolt - 2,000 guilders total - which covers the 900-guilder debt and leaves 1,100.
- Withholding earns nothing, ties up capital, and risks further price decline as English supply grows.
The judgment the exam rewards: sunk costs should not drive the decision. A merchant who reasons "I paid 6 guilders a bolt, I won't sell at 5" destroys the 2,000 guilders of realizable value to protect a bookkeeping number. Sell.
2. Suppose instead the market price were 2 guilders per bolt and Jan's creditor could seize his unsold inventory. How, if at all, does the answer change, and what does this reveal about the limits of the marginal-reasoning argument?
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At 2 guilders, revenue on all 400 bolts = 800 guilders, below the 900-guilder debt. Selling still beats holding (800 > 0 in cash), so the direction is unchanged - sell.
But the reasoning now exposes a limit. Marginal logic says "sell anything above zero recoverable cost." That is correct for cash flow, yet it does not make Jan solvent: he still falls 100 guilders short and loses the business. The marginal argument maximizes recovery; it does not guarantee survival.
So the answer changes not in whether to sell but in what the sale accomplishes. At 5 guilders, selling preserves the firm. At 2 guilders, selling merely minimizes the loss. The exam point: marginal reasoning tells you the least-bad action, not that the outcome is good. Conflating "rational to sell" with "profitable" is the error to avoid.