Higher costs don’t mean higher prices

Source: Ludwig von Mises Institute
by Per Bylund

“The reason an expensive good is produced at high cost is that those high costs can be covered by the anticipated price that it can be sold for. It doesn’t mean that entrepreneurs choose high costs for the fun of it, but that they motivate a certain level of costs based on the anticipated price — and that price is really dependent only on consumer valuation of the final good. In imperfect markets, this means there can be high markups that offer entrepreneurs enormous profits. But this is also what lures other entrepreneurs to enter this particular market, so where there are no significant barriers to entry profits will tend to get squeezed until they reach the standard market rate of return. In this process, costs are pushed down but consumer good prices even more so, thereby making consumers the ultimate winners of this process. So it is not in any sense a paradox that the market price of a box of paint has very little to do with the final price of the painting.” (03/08/17)