« Megacities | Main | Valuing real estate »

June 17, 2008

Price versus cost

Two of the most common terms we hear used in economics are price and cost. They seem almost interchangeable, but to an economist that may not be the case. So what exactly is the difference between price and cost? Listen

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"This difference is one of the things that trip up students, in my experience in teaching economics for 30 years. Cost I think most people can directly relate to. Cost is simply what it takes, in terms of dollars or resources, to produce a particular product or service. So let's say we're looking at a restaurant meal. You look at the cost of the food that goes into that restaurant meal, the labor, maybe some piece of the building and the kitchen equipment and so forth, so basically, what the costs of the inputs are that go into making that restaurant meal. Now, price, on the other hand, some would say, 'Well, price should be the same as cost.' But not necessarily, price is simply what someone is willing to pay for that product or service. So price is really more of a demand or consumer phenomenon, whereas cost comes from the supplier. And so, for example, the price of that restaurant meal would be the price that the owner thinks that he or she can sell it at and is posted on the menu, and the owner will see if that's the right price by how many people are willing to come into the restaurant and pay for it. Now, usually price is greater than cost. That's what gives a business a profit. But it's not always the case. Sometimes price is less than cost, and we're seeing that right now in our down economy, for example. Some real estate is selling at a much lower price that what the cost of that real estate is, and that's a signal to the business to change things, to get out of that business or perhaps try to become more efficient and produce things at a lower cost."

Posted by Dave at June 17, 2008 08:00 AM