Economic Relationship of cost and price

cp

Cost and Price in our daily vocabulary are the same. Most of the people define cost as the amount of money asked/given for something: cost=charge and/or cost=price. However laymen, accountants and professional economist use these two terms daily but with clear-cut meanings. Yet, sometimes price is equaal to cost, in fact the terms differentiate depending upon where one speaks from buyer’s or seller’s point of view:

The Buyer: when he buys something, the price of the item for him is equal to his cost: e.g. If I buy a phone which has a price tag of 200€ – for me as a buyer 200€ represent my costs.

The Seller: for seller the price is a value he is willing to sell an item which covers his cost of producing it (and of course earning some profit) but also the price which the buyer is willing to pay.

To complicate things a bit more: A seller is also a buyer – He buys machines and raw data to produce the item he is willing to sell. His costs also include other expenditures (electricity, wages, etc.) which happen during the production phase, and which cannot be avoided.

pc

All these expenses and costs of sellers are components which form the price that we as a buyer pay for purchasing an item. But the concept of cost is often taken for granted and is presented very simply (just like I’m trying to do in this article)

Alice, returning to Wonderland, asks the Queen of Hearts, “What is Cost?”

“Cost,” the Queen replies, “is what I say it is.”

 For you that would like to read more on this topic and understand the concept of cost and price I suggest you to read ‘Energy pricing” by R.L.Conkling. By reading the book you will gain knowledge both in basic economic principles of price setting, as well as how tariffs in the regulated electricity market are determined.

 

 

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s