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Pastimes : Austrian Economics, a lens on everyday reality
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To: Don Lloyd who wrote (262)11/10/2003 6:58:28 PM
From: Wildstar  Read Replies (2) of 445
 
Don,

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.

I believe the degree of dependency of the price of the factor of production on the price of the consumer good is proportional to its degree of specificity. Yes, the price of copper should be independent of the subjectively determined value of widgets. But, if copper was used to make only widgets, gizmos, and doodads, in equal proportions, then the price of copper would be dependent on the subjectively determined value of widgets to a degree (1/3?).

For a completely specific factor of production, it's price must be completely dependent on the subjectively determined value of the consumer good it produces.

About your example - I want to understand the exact mechanism by which the price of a specific factor of production is determined by the subjective valuations of the consumer good it produces.

...to be continued.
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