Wildstar,
>>From the above we see that when used for headache relief, >>Tylenol is a first order good consumer good, and will be >>produced in high volume and sold at a relatively low >>market price.
Is the fact that Tylenol is produced in high volume related to its relatively low market price? Or is this coincidence?
It is high volume because almost all of the population has a potential demand for it. It has a relatively low market price because it is not vital to any consumer and because the population income density is high for low to middle class consumers. Lowering the price into their acceptable range continues to be elastic for some time and keeps increasing total revenues.
>>OTOH, when Tylenol is used in KDP, it is a non-specific >>production factor, adding only a small amount of unit >>demand for Tylenol, and not significantly changing its >>market price.
So the use of Tylenol as a factor of production would minimally push it to the right on its 'Laffer Curve', slightly below max revenues, but not having a significant impact on its overall revenues due to its high volume sales as a consumer good? (Also, I assume that it's Laffer Curve represents all revenues to the company that manufactures it, regardless of whether it is used as a consumer good or a factor of production. In this case, the company would adjust sales to buyers, whether they be those who intend to use it as a consumer good or factor of production, to 're-maximize' revenues.)
The added demand will come in at the very high price end of the price vs demand curve. This will produce a new Laffer curve, totally different at the high price end, but little changed at the point of maximum total revenue.
>>KDP is a relatively low volume, highly valued and priced >>consumer product. These characteristics are transmitted >>directly to its specific production factor, Lytenol. The >>market price of Lytenol cannot be higher than the market >>price of KDP minus the market price of Tylenol without >>impacting either profits or volume.
This was the part I initially had the most trouble understanding, but I think I have a grasp of it now. The last three words refer to the profits or volume of Lytenol, not KDP, right?...
No. The volume of Lytenol and KDP will be identical, but the profits that I am talking about here are for KDP.
...The general conclusion that I think you are reaching for is that the price of a specific factor of production which yields maximal revenues is mostly determined by the price of the consumer good it produces. However, the price of a non-specific factor of production which yields maximal revenues is much more variable.
Up to this point, the only revenue that I'm maximizing is for a consumer good (or for a good whose primary use is as a consumer good). I'm not knowingly trying to say anything about the variability of any price.
It may have been a mistake to use a consumer good also as a factor of production, as confusion is possible.
Assume that a unique consumer widget is made from two metals, copper and unobtainium. The market price of the widget is approximately set to maximize revenues. This is a direct result of the structure of the subjective demand of consumers.
Copper is a non-specific factor of production for widget manufacturing and has a market price (part of widget manufacturing cost) which is likely to be effectively independent of the widget market and is the result of the interaction of supply and demand of and for copper. The cost of copper is for widget manufacturing NOT typically the result of any subjective value considerations for widgets.
Unobtainium is a specific factor of production for widget manufacturing and its price is only determined by bargaining between the supplier(s) of unobtainium and the manufacturer of widgets. As such, it should have a strong dependence on the market price of widgets and be only one step away from the subjective value of widgets to consumers.
Note that a maximum revenue price sometimes cannot be reached if marginal costs prematurely limit how low the price can go.
As is likely obvious, I'm still struggling with all of this, but every time I write something down, I can hopefully come closer to reality.
Regards, Don |
