Passing along costs to the consumer - anyone care to discuss this fallacy?

[tailfins]

In the SCIENCE of economics there is a thing called elasticity of demand. There is a price that maximizes revenue. It has nothing to do with cost. If the cost exceeds revenue, the item simply isn't produced. If you want to argue shortages, less consumer choice and less innovation come from higher taxes and regulation, that makes sense. The concept of "passing costs to the consumer" doesn't make sense.

[Missileman]

The concept of "passing costs to the consumer" doesn't make sense.

But appears to be "reality" nonetheless.

http://oilprice.com/Energy/Oil-Prices/How-Oil-Prices-Affect-the-Price-of-Food.html

[WiccanLiberal]

Does your math take into account the costs of access to the consumer as well as the cost of the item? It would seem to me that once the item was produced, the price also has to account for how it gets into consumer hands. Manufacturers have to make careful decisions on the most cost-effective means of transport. Please note, I do not hold myself up as an expert in economics but it seems logical to me that these factors must matter at some level. Please discuss further.

[fj1200]

In the SCIENCE of economics there is a thing called elasticity of demand. There is a price that maximizes revenue. It has nothing to do with cost. If the cost exceeds revenue, the item simply isn't produced. If you want to argue shortages, less consumer choice and less innovation come from higher taxes and regulation, that makes sense. The concept of "passing costs to the consumer" doesn't make sense.

There's more in it than that I would say. The cost issue is also broken down short-term vs. long-term. LT, don't produce but in the ST you just need to cover your variable costs to justify continued production.

[jimnyc]

Depends on the "business", IMO.

If beer at the bar is $3.25 a glass, and the distributor raises prices per the keg, the bar will then raise the price of the glasses to compensate. It'll be produced infinitely, as the beer drinkers will complain but keep drinking the beer. Same goes with cigarettes. I remember saying when they first reached $3 a pack that I was going to quit. The state kept raising taxes, the manufacturers raised prices, and the stores then raised prices. At between $10-12 a pack now in New York, it doesn't even to seem to be slowing down. The only one losing is the consumer who continually is the one to pay for all of the increases.

[MtnBiker]

In the SCIENCE of economics there is a thing called elasticity of demand. There is a price that maximizes revenue. It has nothing to do with cost. If the cost exceeds revenue, the item simply isn't produced. If you want to argue shortages, less consumer choice and less innovation come from higher taxes and regulation, that makes sense. The concept of "passing costs to the consumer" doesn't make sense.

Of course the cost to produce and bring a product to market have an effect on the revenue. The concept of pricing a item lower than it's cost doesn't make sense.

[tailfins]

Of course the cost to produce and bring a product to market have an effect on the revenue. The concept of pricing a item lower than it's cost doesn't make sense.

What if pricing the item at cost produces zero sales?

[MtnBiker]

What if pricing the item at cost produces zero sales?

Then it would be a product not worth selling in the market place.

[tailfins]

Then it would be a product not worth selling in the market place.

My point exactly: And then no cost is passed on to the consumer.

[MtnBiker]

My point exactly: And then no cost is passed on to the consumer.


What consumer? If the product is not purchased there is no consumer.

[fj1200]

Passing along costs to the consumer - anyone care to discuss this fallacy?

Your premise isn't exactly a fallacy, it's pretty much standard practice. Consumers are the ultimate payers of the cost, taxes and regulations included, of the goods.

[ConHog]

Of course the cost to produce and bring a product to market have an effect on the revenue. The concept of pricing a item lower than it's cost doesn't make sense.

Not entirely true. Depends on whether you are looking at short term or long term. I like to use the Sony Playstation 3 as an example of this.

In 2006 when the PS3 came out, Sony had it priced at $600. it included a new technology, blu ray, at the same time Sony was selling a stand alone blu ray player for $1200.

Of course this was at a time when Sony was in the middle of a war with Blu Ray versus HD.

Sony took a calculated risk that Selling PS3s below cost in the short term would pay off in the long term. And boy did it.

Of course since the cost of producing PS3s has dropped considerably and so has the price and now 6 years later Sony is making money on every unit sold at $200. Meanwhile a Sony stand alone Blu ray player can be had for $70

Sometimes companies sell products below cost for a reason.

[tailfins]

Your premise isn't exactly a fallacy, it's pretty much standard practice. Consumers are the ultimate payers of the cost, taxes and regulations included, of the goods.

How can any price change be productive if you are already charging the revenue maximizing price based on demand elasticity?

[MtnBiker]

How can any price change be productive if you are already charging the revenue maximizing price based on demand elasticity?

Sell price can change if the the cost price changes. Happens everyday with commodities.

[fj1200]

Sell price can change if the the cost price changes. Happens everyday with commodities.

Tru dat.


How can any price change be productive if you are already charging the revenue maximizing price based on demand elasticity?

You seem to be off on your corporate objective. Revenue maximization is not the goal, profit maximization is. Profits are maximized where Marginal Cost = Marginal Revenue.

And are you a price setter or a price taker? Is the elasticity sticky? Are there alternatives? How sticky are prices? The price of salt could double tomorrow and 1. I probably wouldn't know it because I rarely buy salt, and 2. I wouldn't be concerned because the price of salt is incredibly low. I wonder why people would ever buy relatively expensive Dixie sugar vs. Kroger value sugar at a % of the price, it's a commodity product that, as far as I can tell, is exactly the same.

You left out far too much information to really assess your posit. Of course that may have been your aim. :poke: