Wildstar,
I don't understand - replacement cost of the factor?
No, consumer product.
My preliminary order of battle is something like the following --
The price that a rational firm sets at the PTOS (point and time of sale, as distinguished from a price that is projected during production planning) tends to be that price which is expected to produce the largest total revenue for the firm given the demand function of price that it is estimated to face.
This will not be true for one or both of two reasons.
First, it may not be able to supply the full unit demand that corresponds to the price that would maximize revenue if supply were not constrained. In this case, the price would be set to the higher level at which unit demand is reduced to match available supply.
Secondly, the price that maximizes revenue may be lower than the marginal cost. In this case the price will be set to the higher price to approximate the marginal cost. At this point in time, the accounting cost is merely history, and the marginal cost used is the marginal replacement cost, assuming that replacement is actually intended.
Unless I am mistaken, all of the above maximizes a kind of current economic profit, but not necessarily accounting profit.
Also, all of the above applies to both monopoly and competitive markets, with the difference being that the shape and size of the demand curve is far different, and that for the competitive market the demand curve faced by a firm changes for every change in price of its competitors.
Regards, Don |
