...continued.
Let's start with the demand for widgets and work our way backwards. For each potential consumer of widgets, there is a price low enough that he is willing to exchange his cash for a widget. In the aggregate, this results in a price vs. revenues Laffer curve for widgets prior to any considerations of cost for the supplier.
With this Laffer curve existing, it is the aim of the supplier to produce the quantity of widgets and sell at the price of widgets that yields the peak of the curve.
If widgets are made from copper, a non-specific factor of production, and unobtanium, a specific factor of production, the supplier of widgets will bargain with the suppliers of copper and unobtainium to buy at the lowest price possible.
Since similar bargaining takes place between many other suppliers of consumer goods other than widgets and the supplier of copper, the price at which the supplier of widgets buys copper from the supplier of copper is not much affected by the price of widgets, which itself is determined by the subjective demand for widgets by consumers. In summary, the subjective demand for widgets is not a determining factor for the price of copper.
However, when the supplier of widgets bargains with the supplier of unobtainium, there is no competing demand for unobtainium from suppliers of other consumer goods that use unobtainium as a factor of production.
If we take the price of widgets set by the supplier of widgets as the price of maximal revenues, then that price minus the market price of copper [Let's call this The Difference] will be the maximum the supplier of widgets will have 'left over' to pay for unobtainium. Otherwise, he will be in the red.
If he has to pay more than this for unobtainium, then he will have to set his price for widgets higher, resulting in a move to the right on the Laffer curve, decreasing total revenues. Again, he will be in the red. This means that The Difference will be the maximum he can pay for the unobtainium and still stay solvent in the long run.
Summary - The price of the specific factor of production, unobtainium, is essentially bounded by The Difference between the price at which he can obtain maximum revenues and the price of the non-specific factor of production, copper. The subjective valuations of consumers for widgets completely determine the price for the specific factor of production unobtainium.
Wildstar
**Actually, now that I think about it, I think the whole Laffer curve is a side issue. Suppliers should price consumer goods to maximize revenues but they might be forced to price above or below due to costs or competition, respectively. The take home message seems to be that whatever revenues are obtained, some part of that is used to purchase the factors of production. Thus, they place an upper limit on the price of factors of production. |
