First, I want to make sure you caught my last direct response to you, here…(It ended up being the very last post on that page and someone came in and posted right after it so you may have missed it)
Be sure to read through that response I linked above, but look at it this way:
If you offered to sell a widget … and decided since it cost you $25 to produce, you would set your price at $50 …What if no one bought at that price? Most producers in that situation would lower their price. What if someone came up to you and said “I’ll buy that widget for $40” and you decided to take the deal. What determined the price?
But if you could know the resources available, and if you had everyones set of preferences and expectations then you would be able to arive at the price solution.
This is the sort of thing I would find convincing. Could you direct me to a place where a model demonstrates this to be possible?
Also, visit this topic. The quoting system became broken a while back, but you can manually fix it each time. It will make your posts much more readable:
Here is the Salerno speech I mentioned (on Preference/Value Scales), he starts talking about them around the 36 minute mark, but I would recommend watching the entire speech:
Stimuly do not cause responses in people. People are not pieces of iron. If you heat iron (stimulus) you get lengthening (response) EVERY TIME. If you apply heat to a human beeing you don’t know what specificaly to expect, but the end result will be the person trying to keep his temperature at 37 dg celsius. He might take off his shirt, he might eat an icecream, turn on a fan or jump in cold water.
You can never know what he will do, but only what his purpose is.
In exchange, anyone’s purpose might be not to lose money or to profit. The price someone sets might be a result of calculating costs, might be a result of calucating how much other people are willing to pay, might be any abstract formula, doesn’t matter. The only cause of prices are the people who are selling.
One of the best examples I have read came from a Daily post during Christmas.
The example was one of those inflatable santa’s that are oh-so-popular during that time of the year. A couple sees one and the wife decides she wants it. They are sold out of all the ones in the box, but they still have the display model. The couple is able to negotiate 10% off due to the fact that it was displayed.
This particular model, though, actually had the highest production cost of all of them. It took the time of a paid employee to set up the display, and then to set it down. More production cost, but lower price. All because of preference.
If noody had diabities(or if there were some other way to perminantly cure diabities), then insilin would be worthless, no matter how many people/firms were producing it…
These last couple of posts just completely misunderstand the point that I am making. As to the posts that came before that, I am reading through Bohm Bawerks essay and will respond soon. Cheers for directing me to it, its very interesting so far.
Forgive me if I claim to much, but it seems as though you’re also assuming that production cost can’t/won’t change either. The likely in such a scenario winner isn’t one who can successfully sell their product above production costs, but the competitor that can produce their product at lower cost than their competitors can.
In such a competitive environment, the incentive to discover methods for lowering production costs would be paramount. A business with the capability to reduce production costs would likely keep their prices at market level and bank the profit unless they felt particularly aggressive and wished to out-bid everyone else whilst they had the edge.
So, while production cost is a lower limit, it is by no means static or unchangable. Just look at the industrial revolution. While I think I just gave an argument for production over preference, I would have to agree with the preference argument. Others here have supported it well enough I believe.
“So, while production cost is a lower limit, it is by no means static or unchangable”
This is it. This is exactly what I am claiming. Production cost is a lower limit, but it is a lower limit towards which prices gravitate. It is this gravitation that incentivises firms to innovate and produce at lower costs with new technology.
Production costs only contribute to price once competition has created an incentive to modify it though. Prices originate with preference. Consider:
No elixer of immortality exists, yet the demand for immortality exists.
Regardless of the production cost, a preference of willingness to pay for it exists. A proper Nihilist sees no point in purchasing immortality, nor does a religous fellow awaiting other-wordly paradise.
Demand preceeds production. Thus, price is primarily established by preference. Even if some abstract, never before concieved product is invented by one creative fellow with a use concieved only by him or her–it’s price can only be set by the preference of another willing to put it to use for it’s stated reasons or otherwise.
Preference sets price because preference is an analog for desire. Desire always preceeds action. So while production costs are an important variable in the price function, they are wholly subservient to preference ultimately.
Yes, this is just another way of saying Marginal Revenues tend towards Marginal Costs.
But just to reiterate, even those Production Costs are dependant on consumer preferences (see all of the previous posts/articles everyone has been pointing you towards).
Production costs are irrelevant. They are sunk. After the product has been produced you sell it for what ever you can get for it. If the most you can get for it is less than your costs…well then you earn a loss.
It is consumer demand in the face of the scarcity of the product that determines the price. Costs only play a role in the price in the sense that producers pick a quanitity of production that will result in a price higher or equal to their costs.
Your analysis is actually very close to the pre-marginal revolution analysis of classical economists.
This is highly true. I happen to know a few things about the price of nickel ore, because my sister-in-law works for a nickel mining company in the Philippines. Their chief client is China, who uses the nickel to manufacture consumer goods for the USA and other first-world clients. Since 2008 the demand for consumer goods dropped, and the demand for nickel dropped. Interestingly enough, the cost of production did not drop. In fact, the cost of production rose slightly with the rise in fuel costs experienced in the Philippines. (Philippines didn’t get the gas price reprieve that the USA experienced from 2008-2010.)
What the Philippine nickle mine did was to decrease production, because they were only willing to sell a certain amount at the price the market would bear. As you can see by this graph, the price has risen steadily. Demand has also risen steadily, and the whole thing runs approximately parallel to the stock market, which is to be expected. More companies make more money, and have more money to spend on Nickel, which raises the demand for Nickel, which raises the price. Here is a graph of Nickel prices since January 2008:
What the Austrians are saying about demand being the most important factor is probably just misunderstood. During the early years of the industrial revolution, production was probably a greater factor in the price of a good. Demand was generally stronger than production would allow, and the innovations in automation drove prices down for most items. After all, now you didn’t have to hire a tailor to sew your suit by hand, your suit was made on a production line in a fraction of the time. But now the cost of production is more stable than demand, and this is the reason demand is the key factor in the price of a commodity.
Today, if you are an engineer-entrepreneur and you come up with a way to make a widget at a lower cost than your competition, you will first consider your market share. Out of all the widgets on the market, how many can my company produce? You would then run some fancy formulas to optimize your output and price for the greatest expected profit margin. If you can only produce a small portion of the market share, you may not need to undercut the average price at all and still manage to sell all of your widgets.
But the larger your market share, the more demand you will be satisfying. When a company has had its fill of your widgets, it will stop buying them, first the companies with the most capital to purchase your widgets, then companies with less capital. When that happens, you cannot sell your widgets are the same price. You must drop the price to entice companies with less capital to purchase your widgets.
So, I hope you can see that unless the innovator has a large proportion of the market share, a reduction in the cost of production will do little to effect the price.
This chart probably does a better job than my jabbering. The two red lines represent the demand curve, one from before a dynamic demand shift, and the other after.
The price P of a product is determined by a balance between production at each price (supply S) and the desires of those withpurchasing power at each price (demand D). The diagram shows a positive shift in demand from D1 to D2, resulting in an increase in price (P) and quantity sold (Q) of the product.
While searching for a speech/article/book by Rothbard where he explained how Supply And Demand are just two sides of the same coin, I ran into this gem by Frank Shostak, “The Limits of Supply and Demand”. It covers all of the points being brought up and more (especially the costs of production view):
