Logical rule price controls must satisfy.
June 23rd, 2009 | Published in Economics idea | 4 Comments
Price controls must obey the following rule:
The price of a product needs to be greater than or equal to the cost of the producing it.
If the rule is broken, businesses that make the product will fail because their expenses will exceed their revenues. The mechanics of how businesses convert inputs into outputs forces the price of a product to be greater than or equal to the cost of making it.
The rule can be circumvented only if someone is prepared to subsidize production.
Are there any other logical rules like this that need to be satisfied for a price control system to work?
June 24th, 2009 at 2:58 pm (#)
Stephen,
I’d say that the price also needs to be lower than what the customer is willing to pay for it, or else the business will also fail.
A key complication will be that the cost to produce a product in most cases will not be clear. There are capital and operating cost components as well as overhead contributions, depreciation, and a number of other complicating factors. For a single-product company, probably the easiest way would be to look at their overall costs at the end of the year and divide by the number of units sold. I’m not sure if this can be done in an objective way for a multi-product company.
Other questions/comments:
1. If we know the unit cost, would you envision averaging the cost over some period of time (say a year), or trying to tie a cost to each specific unit?
2. How about transportation costs? Would the price for a widget be that much less near the factory compared to the next county over because you have to truck it there?
3. What about risk? Often costs go down the more you produce more, but if you produce too much, they don’t all sell and you lose money. You could apportion out the cost of the unsold items to the sold items, but you won’t know this until after the fact.
Eric
June 25th, 2009 at 8:35 pm (#)
Eric.
I view the rule that the price of a good needs to be greater than the cost of producing it as only a necessary condition for a price control system to work. It isn’t a sufficient condition to guarantee it will work.
Your rule that people have to be willing to buy it is good. If inventory just sits on the shelves, the company won’t last long.
The rest of your comments and points are good. I, too, have thought of them. You are, however, getting ahead of me a bit. All I am pointing out in this post is that the production process constrains how prices controls can be used.
You have obviously read the material in the economics section of my website. What I am trying to do in my blog post now is work through some of the ideas trying to tease out specific ideas to highlight.
June 25th, 2009 at 8:42 pm (#)
Your premise that the price of a good should be greater than the cost to produce it as a standard is extremely shortsighted. It begs the introduction of waste in the manufacturing process, since there would always be a margin. Bad business and probably bad economics. Left alone, the market is extremely efficient at wringing out waste and sqeezing margin.
July 2nd, 2009 at 4:47 am (#)
In Transfinancial Economics, or TFE the amount of money in theory is at least infinite. Its manifestation into the economy is based on good planning, and relevant resources by governments, NGOs, businesses..etc.
Price capping is not really a problem but is only undetaken if absolutely necessary. It would in TFE be dealt with where necessary with instant subsidies which could be electronically created by reformed banks (rather than governments)plus a limited planned intervention to ensure the business concerned survive as successful entities.
Again, the authorized creation of subsidies would be a simple thing as money itself is infinite. It would just involved the press of a button, and it will appear as if by magic in the relevant customers account.
You maybe interested to know that I have done an update of my project on Transfinancial Economics…