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Because people don’t pay for the cost of goods, they pay for the value they provide. If you need heart surgery that takes four hours, would you pay someone the

by imgabe 3y ago

Because people don’t pay for the cost of goods, they pay for the value they provide. If you need heart surgery that takes four hours, would you pay someone the same amount to take a four hour nap instead? Probably not, but why not? According to your logic the person performing heart surgery and the person taking a nap are both using up four hours of their life, so they should get paid the same amount, right?

danbruc 3y ago
Consumers will pay up to the value the product provides to them [1] and producers will sell down to the costs of producing the product. So why do we have economy? We have it in order to provide consumers with goods and services they need or desire as efficiently as possible, not to make producers rich. Profits are a mechanism to steer behavior in an economy, they are not the goal. So in general the price should always get pushed towards the costs of production, that is the role of competition. In case of scarcity the value attribute by different consumers will pull the price up in order to decide the allocation of the available products. [2] This should also encourage the creation of additional supply because the costs of production are below the price so there are profits to be made and the additional supply should then drive the price down further towards costs of production. Long story short, the price should equal the costs of production, that is the goal. Any deviation from that just exists as a signaling mechanism to steer the system and decide the distribution. [1] Actually up to the smaller of the value the product provides to them and the money they have available, see also [2]. [2] Note that the available products do not go to the consumers valuing the products the most, they go the consumers capable to pay the highest price. With enough money I could buy up all the heart surgeries because I like collecting them and deprive everyone else of heart surgeries even though they actually need them and value them much higher than me but just do not have the necessary money to outcompete me.

by imgabe 3y ago

danbruc 3y ago

Consumers will pay up to the value the product provides to them [1] and producers will sell down to the costs of producing the product. So why do we have economy? We have it in order to provide consumers with goods and services they need or desire as efficiently as possible, not to make producers rich. Profits are a mechanism to steer behavior in an economy, they are not the goal. So in general the price should always get pushed towards the costs of production, that is the role of competition. In case of scarcity the value attribute by different consumers will pull the price up in order to decide the allocation of the available products. [2] This should also encourage the creation of additional supply because the costs of production are below the price so there are profits to be made and the additional supply should then drive the price down further towards costs of production. Long story short, the price should equal the costs of production, that is the goal. Any deviation from that just exists as a signaling mechanism to steer the system and decide the distribution. [1] Actually up to the smaller of the value the product provides to them and the money they have available, see also [2]. [2] Note that the available products do not go to the consumers valuing the products the most, they go the consumers capable to pay the highest price. With enough money I could buy up all the heart surgeries because I like collecting them and deprive everyone else of heart surgeries even though they actually need them and value them much higher than me but just do not have the necessary money to outcompete me.