<p>It depends on who you ask. Materialist economists such as Smith and Marx pose that in a functioning market (with different parties competing for market share), margins would be stretched ever thinner, and the bottom price for any good or service is exactly what it costs to produce it (real value) + enough profit for the employer to cover their cost of living. This is part of the labour theory of value (LTV). Higher profits (which they call surplus value) are possible, but are the result of temporary fluctuations in supply and demand or monopolization:</p>
<blockquote>
<p>You would be altogether mistaken in fancying that the value of labour
or any other commodity whatever is ultimately fixed by supply and
demand. Supply and demand regulate nothing but the temporary
fluctuations of market prices. They will explain to you why the market
price of a commodity rises above or sinks below its value, but they
can never account for the value itself. Suppose supply and demand to
equilibrate, or, as the economists call it, to cover each other. Why,
the very moment these opposite forces become equal they paralyze each
other, and cease to work in the one or other direction. At the moment
when supply and demand equilibrate each other, and therefore cease to
act, the market price of a commodity coincides with its real value,
with the standard price round which its market prices oscillate. In
inquiring into the nature of that VALUE, we have therefore nothing at
all to do with the temporary effects on market prices of supply and
demand. The same holds true of wages and of the prices of all other
commodities. ( Marx, Karl. &quot;Economic Manuscripts: Value, Price and Profit&quot;)</p>
</blockquote>
<p>Obviously mainstream economists reject the LTV and go with &quot;value is subjective&quot; and just leave it at that.</p>

CC BY-SA 4.0
2024-10-22T09:47:13.760Z
I guess Elon Musk makes exactly as much profit to (barely) survive and cover his cost of living.
Michael Greinecker
CC BY-SA 4.0
2024-10-22T12:23:43.237Z
Can you please provide the source for the statement that “higher profits … are possible, but are results of imperfect markets … . **this is called the labor theory of value**? Labor theory of value doesn’t have anything to do with imperfect competition or monopolies. Labor theory of value states that value has an objective correspondence to labor inputs. LTV is independent of whether competition is perfect or not. Surplus value is also not equal to abnormal profit due to imperfect competition. Please provide sources to those claims as well per our policy (see next comment)
1muflon1
CC BY-SA 4.0
2024-10-22T12:28:03.773Z
Hi, welcome to Economics:Stack Exchange. Please consider improving the answer by adding references from reputable and scholarly sources. As many other science stacks do, we require formal proofs, statistical evidence or links to external sources for answers making claims which are not common knowledge. Unsourced material can be edited or deleted. For more details see our help center and FAQ on community standards for answers
1muflon1
CC BY-SA 4.0
2024-10-23T16:39:49.013Z
@1muflon1 "as many other science stacks do" economy is not a science. Stop pretending that it is. I'm not going through all 1000 pages of Das Kapital every time someone asks about value. That is something the question-asker can do themselves if they're interested.
wrt the LTV: it literally says on wikipedia that "the LTV recognizes [] that the actual price of a commodity is influenced [] by market conditions, including supply and demand and the extent of monopolization." I've added the source for this quote in my answer, but again, it seems like anyone could have found this themselves.
Jumboman
CC BY-SA 4.0
2024-10-23T16:50:20.357Z
@MichaelGreinecker Musk got rich from software, which is not a product but a rent-seeking commodity. He invests in other things (like stocks) which are not really commodities either. Both SpaceX and social media are highly monopolized industries (try launching your own). If you have no clue about economics, don't pretend to know better than Marx.
Jumboman
CC BY-SA 4.0
2024-10-23T16:56:24.050Z
@1muflon1 furthermore I highly suspect that the downvotes I systematically get on this forum whenever I mention Marx has much more to do with an ideological prejudice than with the actual quality of the answer or its sources. Why would I bother writing a quality answer when I know that the Austrians and Keynesians are going to make my answer disappear anyway? This substack does not encourage a wide range of theories and viewpoints as a proper science would.
Jumboman
CC BY-SA 4.0
2024-10-24T01:36:00.453Z
@Jumboman 1.The paragraph you cite still doesn’t provide support for your claim because you are claiming labor theory of value is based on costs firm has. According to Marx real value is not the costs company has, like opportunity costs, but socially necessary amount of labor. 2. Problem is not that you are using Marxist theory but that you are not even accurately describing it. 3. These are rules you signed up to when you created an account. 4. Role of science or this stack is not to encourage wide range of theories and viewpoints. A) this is Q&A site not preprint server or microblog or forum
1muflon1
CC BY-SA 4.0
2024-10-24T01:41:31.010Z
If you are here to share your theories you are on wrong site. You should attempt to answer a question not share your personal (mis)interpretation of theories or viewpoints. B) following modern Popperian-Khunian tradition, the role of science is to test theories and paradigms built from interlinking theories. Role of science is not to simply encourage wide range of viewpoints like encourage flat earth theories when such models of earth were long ago rejected by modern empirical evidence.
1muflon1
CC BY-SA 4.0
2024-10-27T16:41:34.623Z
@1muflon1 When I say "viewpoints" I don't mean that in a "my 2 cents" fashion. The existence of 'schools of thought' in economics indicates that different *scientific* viewpoints exist in this field, just like in actual sciences such as psychology, education and physics. The idea that there is a single truth which all economists are seeking is frankly laughable, and the idea that they would all draw the same conclusions from the same observations is absurd, just like it's funny you should mention Popper when the Austrian school literally champions it's unverifiability.
Jumboman
CC BY-SA 4.0
2024-10-27T16:51:03.600Z
@1muflon1 and as for my answer, OP asked about PRICE, not about value, so the concept of socially necessary labour time (paraphrased as "what it costs to produce it" because OP probably has no idea what the original phrase means) isn't as relevant. - an OP asking a "very basic economics question" probably wouldn't understand the concept of labour time imbued in a commodity ("how can something be worth minutes instead of dollars?"). If you want me to specify that I mean marginal costs and do not include amortized fixed costs, that's feedback I'd be happy to receive.
Jumboman
CC BY-SA 4.0
2024-10-27T18:23:54.893Z
1. "When I say "viewpoints" I don't mean that in a "my 2 cents" fashion." <- but that is exactly what you are doing since your statements about LTV are unsupported. 2. Still the paragraph you cite does not support the following: ", and the bottom price for any good or service is exactly what it costs to produce it (real value) + enough profit for the employer to cover their cost of living. This is part of the labour theory of value (LTV)." And moreover, Marx did not even say that surplus value is a consequence of monopolization, he claimed every profit is surplus value.
1muflon1
CC BY-SA 4.0
2024-10-22T07:50:38.600Z
2024-10-27T16:52:39.443Z
2024-10-27T16:52:39.443Z
Jumboman
<blockquote>
<p>From what I've learnt, the price of a good depends only on supply and demand. It does not depend on the cost of production. The profit is the difference between the selling price and the cost, and the seller will sell the good only if the profit is greater than zero. So, the cost of a good determines the profit of the seller and whether he will sell or not. It does not determine the price of the good.</p>
</blockquote>
<blockquote>
<p>Is this correct?</p>
</blockquote>
<p>There are some correct statements and some incorrect ones let’s unpack it sentence by sentence.</p>
<blockquote>
<p>From what I've learnt, the price of a good depends only on supply and demand. It does not depend on the cost of production.</p>
</blockquote>
<p>Price, on free market, is result of supply and demand interactions. However, that does not mean it only depends on them. For example, demand is derived from people’s preferences, given by utility function (e.g. see Varian Microeconomic Analysis for examples of this in chapter 9).</p>
<p>Moreover, supply (if it is well defined, e.g. monopolies do not have well defined supply), depends among other things on costs firm have. If firms are rational they equate marginal revenue to marginal costs when making decisions so all rational firm decision making depends on costs. Even in cases where supply is not well defined like monopoly (again see Varian but this time Ch 2).</p>
<p>Furthermore, even when we allow for irrational firm behavior many heuristic rules ultimately depend on costs. For example, popular decision making rule is that firms charge prices that are equal to marginal costs plus markup. This is still ultimately just another rule that determines how much the firm supplies to the market thought.</p>
<p>In some cases, such as auctions production cost of item might not factor in supply. However, these are special cases.</p>
<p>So the first part of the statement is correct but the second part generally not. There are more dependencies, yes price is determined by supply and demand but in turn supply and demand do not come just for nowhere and they are determined by other factors, and in case of supply costs are often important determining factor for supply.</p>
<blockquote>
<p>The profit is the difference between the selling price and the cost, and the seller will sell the good only if the profit is greater than zero.</p>
</blockquote>
<p>No. What you describe is not profit. Profit is by definition difference between total revenue and total costs. A difference between price and <strong>costs per last unit</strong> would be marginal profit. Price minus costs doesn't generally yield profit except for special cases like <span class="math-container">$q=1$</span>.</p>
<p>Moreover, it is not true that seller would not sell goods when profit is negative. Even in very simple textbook models of perfect competition, in short-run,  firms are perfectly willing to operate at loss. Only in long-run rational business needs non-negative profit to operate (i.e. zero profit is fine as well).</p>
<blockquote>
<p>So, the cost of a good determines the profit of the seller and whether he will sell or not.  It does not determine the price of the good.</p>
</blockquote>
<p>This is correct if we talk about situation/model where goods are produced before they are sold, but not correct for models where production is made on demand.</p>
<p>Again as explained above, costs can be one of the determinants of supply, so price can and often does depend on costs.</p>

CC BY-SA 4.0
2024-10-22T14:28:39.890Z
2024-10-22T14:28:39.890Z
1muflon1
<p>This is a very basic economics question, but one that has been nagging me for a long time, so please bear with me.</p>
<p>From what I've learnt, the price of a good depends only on supply and demand. It does <strong>not</strong> depend on the cost of production. The profit is the difference between the selling price and the cost, and the seller will sell the good only if the profit is greater than zero. So, the cost of a good determines the profit of the seller and whether he will sell or not. It does <strong>not</strong> determine the price of the good.</p>
<p>Is this correct?</p>

CC BY-SA 4.0
2024-10-20T08:37:21.443Z
The cost has an influence on supply. So if "the price of a good depends only on supply and demand," it can still depend on the cost of production.
Michael Greinecker
<supply-and-demand><cost>
Price of a good does not depend on its cost of production, right?
Shoes
# Price of a good does not depend on its cost of production, right?

(Asked by: username_0 on 2024-10-20)

This is a very basic economics question, but one that has been nagging me for a long time, so please bear with me.

From what I've learnt, the price of a good depends only on supply and demand. It does **not** depend on the cost of production. The profit is the difference between the selling price and the cost, and the seller will sell the good only if the profit is greater than zero. So, the cost of a good determines the profit of the seller and whether he will sell or not. It does **not** determine the price of the good.

Is this correct?

**Tags:** supply-and-demand, cost

> **Comments:**
> **username_1**: The cost has an influence on supply. So if "the price of a good depends only on supply and demand," it can still depend on the cost of production.  

---

## 2 answers

### Answer by username_3 on 2024-10-22. Score: 2 | Accepted answer

> From what I've learnt, the price of a good depends only on supply and demand. It does not depend on the cost of production. The profit is the difference between the selling price and the cost, and the seller will sell the good only if the profit is greater than zero. So, the cost of a good determines the profit of the seller and whether he will sell or not. It does not determine the price of the good.

> Is this correct?

There are some correct statements and some incorrect ones let’s unpack it sentence by sentence.

> From what I've learnt, the price of a good depends only on supply and demand. It does not depend on the cost of production.

Price, on free market, is result of supply and demand interactions. However, that does not mean it only depends on them. For example, demand is derived from people’s preferences, given by utility function (e.g. see Varian Microeconomic Analysis for examples of this in chapter 9).

Moreover, supply (if it is well defined, e.g. monopolies do not have well defined supply), depends among other things on costs firm have. If firms are rational they equate marginal revenue to marginal costs when making decisions so all rational firm decision making depends on costs. Even in cases where supply is not well defined like monopoly (again see Varian but this time Ch 2).

Furthermore, even when we allow for irrational firm behavior many heuristic rules ultimately depend on costs. For example, popular decision making rule is that firms charge prices that are equal to marginal costs plus markup. This is still ultimately just another rule that determines how much the firm supplies to the market thought.

In some cases, such as auctions production cost of item might not factor in supply. However, these are special cases.

So the first part of the statement is correct but the second part generally not. There are more dependencies, yes price is determined by supply and demand but in turn supply and demand do not come just for nowhere and they are determined by other factors, and in case of supply costs are often important determining factor for supply.

> The profit is the difference between the selling price and the cost, and the seller will sell the good only if the profit is greater than zero.

No. What you describe is not profit. Profit is by definition difference between total revenue and total costs. A difference between price and **costs per last unit** would be marginal profit. Price minus costs doesn't generally yield profit except for special cases like $q=1$.

Moreover, it is not true that seller would not sell goods when profit is negative. Even in very simple textbook models of perfect competition, in short-run, firms are perfectly willing to operate at loss. Only in long-run rational business needs non-negative profit to operate (i.e. zero profit is fine as well).

> So, the cost of a good determines the profit of the seller and whether he will sell or not. It does not determine the price of the good.

This is correct if we talk about situation/model where goods are produced before they are sold, but not correct for models where production is made on demand.

Again as explained above, costs can be one of the determinants of supply, so price can and often does depend on costs.


---

### Answer by username_2 on 2024-10-22. Score: -5

It depends on who you ask. Materialist economists such as Smith and Marx pose that in a functioning market (with different parties competing for market share), margins would be stretched ever thinner, and the bottom price for any good or service is exactly what it costs to produce it (real value) + enough profit for the employer to cover their cost of living. This is part of the labour theory of value (LTV). Higher profits (which they call surplus value) are possible, but are the result of temporary fluctuations in supply and demand or monopolization:

> You would be altogether mistaken in fancying that the value of labour
> or any other commodity whatever is ultimately fixed by supply and
> demand. Supply and demand regulate nothing but the temporary
> fluctuations of market prices. They will explain to you why the market
> price of a commodity rises above or sinks below its value, but they
> can never account for the value itself. Suppose supply and demand to
> equilibrate, or, as the economists call it, to cover each other. Why,
> the very moment these opposite forces become equal they paralyze each
> other, and cease to work in the one or other direction. At the moment
> when supply and demand equilibrate each other, and therefore cease to
> act, the market price of a commodity coincides with its real value,
> with the standard price round which its market prices oscillate. In
> inquiring into the nature of that VALUE, we have therefore nothing at
> all to do with the temporary effects on market prices of supply and
> demand. The same holds true of wages and of the prices of all other
> commodities. ( Marx, Karl. "Economic Manuscripts: Value, Price and Profit")

Obviously mainstream economists reject the LTV and go with "value is subjective" and just leave it at that.

> **Comments:**
> **username_1**: I guess Elon Musk makes exactly as much profit to (barely) survive and cover his cost of living.  
> **username_3**: Can you please provide the source for the statement that “higher profits … are possible, but are results of imperfect markets … . **this is called the labor theory of value**? Labor theory of value doesn’t have anything to do with imperfect competition or monopolies. Labor theory of value states that value has an objective correspondence to labor inputs. LTV is independent of whether competition is perfect or not. Surplus value is also not equal to abnormal profit due to imperfect competition. Please provide sources to those claims as well per our policy (see next comment)  
> **username_3**: Hi, welcome to Economics:Stack Exchange. Please consider improving the answer by adding references from reputable and scholarly sources. As many other science stacks do, we require formal proofs, statistical evidence or links to external sources for answers making claims which are not common knowledge. Unsourced material can be edited or deleted. For more details see our help center and FAQ on community standards for answers  
> **username_2**: @username_3 "as many other science stacks do" economy is not a science. Stop pretending that it is. I'm not going through all 1000 pages of Das Kapital every time someone asks about value. That is something the question-asker can do themselves if they're interested. wrt the LTV: it literally says on wikipedia that "the LTV recognizes [] that the actual price of a commodity is influenced [] by market conditions, including supply and demand and the extent of monopolization." I've added the source for this quote in my answer, but again, it seems like anyone could have found this themselves.  
> **username_2**: @username_1 Musk got rich from software, which is not a product but a rent-seeking commodity. He invests in other things (like stocks) which are not really commodities either. Both SpaceX and social media are highly monopolized industries (try launching your own). If you have no clue about economics, don't pretend to know better than Marx.  
> **username_2**: @username_3 furthermore I highly suspect that the downvotes I systematically get on this forum whenever I mention Marx has much more to do with an ideological prejudice than with the actual quality of the answer or its sources. Why would I bother writing a quality answer when I know that the Austrians and Keynesians are going to make my answer disappear anyway? This substack does not encourage a wide range of theories and viewpoints as a proper science would.  
> **username_3**: @username_2 1.The paragraph you cite still doesn’t provide support for your claim because you are claiming labor theory of value is based on costs firm has. According to Marx real value is not the costs company has, like opportunity costs, but socially necessary amount of labor. 2. Problem is not that you are using Marxist theory but that you are not even accurately describing it. 3. These are rules you signed up to when you created an account. 4. Role of science or this stack is not to encourage wide range of theories and viewpoints. A) this is Q&A site not preprint server or microblog or forum  
> **username_3**: If you are here to share your theories you are on wrong site. You should attempt to answer a question not share your personal (mis)interpretation of theories or viewpoints. B) following modern Popperian-Khunian tradition, the role of science is to test theories and paradigms built from interlinking theories. Role of science is not to simply encourage wide range of viewpoints like encourage flat earth theories when such models of earth were long ago rejected by modern empirical evidence.  
> **username_2**: @username_3 When I say "viewpoints" I don't mean that in a "my 2 cents" fashion. The existence of 'schools of thought' in economics indicates that different *scientific* viewpoints exist in this field, just like in actual sciences such as psychology, education and physics. The idea that there is a single truth which all economists are seeking is frankly laughable, and the idea that they would all draw the same conclusions from the same observations is absurd, just like it's funny you should mention Popper when the Austrian school literally champions it's unverifiability.  
> **username_2**: @username_3 and as for my answer, OP asked about PRICE, not about value, so the concept of socially necessary labour time (paraphrased as "what it costs to produce it" because OP probably has no idea what the original phrase means) isn't as relevant. - an OP asking a "very basic economics question" probably wouldn't understand the concept of labour time imbued in a commodity ("how can something be worth minutes instead of dollars?"). If you want me to specify that I mean marginal costs and do not include amortized fixed costs, that's feedback I'd be happy to receive.  
> **username_3**: 1. "When I say "viewpoints" I don't mean that in a "my 2 cents" fashion." <- but that is exactly what you are doing since your statements about LTV are unsupported. 2. Still the paragraph you cite does not support the following: ", and the bottom price for any good or service is exactly what it costs to produce it (real value) + enough profit for the employer to cover their cost of living. This is part of the labour theory of value (LTV)." And moreover, Marx did not even say that surplus value is a consequence of monopolization, he claimed every profit is surplus value.  

---

