Price versus cost
Date posted: April 14, 2011
The terms price and cost are often used interchangeably in conversations about economics and business. But, as N.C. State University economist Mike Walden explains, they don’t really mean the same thing.
“On the cost side, we argue that something is a cost if it is a resource used to make a product or service. So the cost of something like a table is the value of those resources those inputs that went into making that table. And, of course, that would include materials as well as labor.
“Price, on the other hand, is what someone is willing to pay for that table. Now normally we see that price is greater than cost, and obviously a producer wouldn’t stay in business unless that producer could get a price back that at least equaled his cost and actually gave him a little more profit on the side.
“But we don’t always see that, and right now a very good example is the housing market. There are many homes that are for sale at a lower price than what it costs to make them and produce them. And that’s because of what’s happened in the housing market — the big crash, the big decline in sales.
“And this is making it very hard for many home sellers to adjust, because they look at what they paid for the house, which we’ll say is very close to the cost. They look then at what they could sell the hose for today; they find that it is lower, and they have to really change their mentality and accept that lower price if they want to make the sale.”
Category: Economic Perspective