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In economics, the cost-of-production theory of value is the theory that the price of an object is determined by the sum of the cost of the resources that went into making it. The cost can be composed of the cost of any of the factors of production including labour, taxation, capital, land, or technology. Face-to-face trading interactions on the New York Stock Exchange trading floor. ...
In economics, factors of production are resources used in the production of goods and services. ...
The theory makes the most sense under assumptions of constant returns to scale and the existence of just one non-produced factor of production. These are the assumptions of the so-called non-substitution theorem. Under these assumptions, the long run price of a commodity is equal to the sum of the cost of the inputs into that commodity, including interest charges. In economics, returns to scale and economies of scale are terms that are related, and sometimes incorrectly used interchangeably. ...
Historically, the most well known proponent of such theories is probably Adam Smith. Piero Sraffa, in his introduction to the first volume of the "Collected Works of David Ricardo", referred to Adam Smith's adding up theory. Smith contrasted natural prices with market prices. Smith theorized that market prices would tend towards natural prices, where outputs would be at what he characterized as the "level of effectual demand". At this level, Smith's natural prices of commodities are the sum of the natural rates of wages, profits, and rent that must be paid for inputs into production. (Smith is ambiguous about whether rent is price-determining or price determined. The latter view is the consensus of later classical economists, with the Ricardo-Malthus-West theory of rent.) Adam Smith FRSE (baptised June 5, 1723 O.S. / June 16 N.S. – July 17, 1790) was a Scottish moral philosopher and a pioneering political economist. ...
Piero Sraffa. ...
Principles of Political Economy and Taxation is the title of a book by David Ricardo on ecomonics. ...
Prices of production refers to a concept in Karl Marxs critique of political economy. ...
Classical economics is widely regarded as the first modern school of economic thought. ...
David Ricardo mixed such cost of production theory of prices with the labor theory of value, as that latter theory was understood by Eugen von Bohm-Bawerk and others. This is the theory that prices tend toward proportionality to the socially necessary labor embodied in a commodity. Ricardo sets this theory at the start of the first chapter of his "Principles of Political Economy and Taxation". Ricardo also refutes the labor theory of value in later sections of that chapter. This refutation leads to what later became known as the transformation problem. Karl Marx later takes up that theory in the first volume of "Capital", while indicating that he is quite aware that the theory is untrue at lower levels of abstraction. This has led to all sorts of arguments over what both David Ricardo and Karl Marx "really meant". Nevertheless, it seems undeniable that all the major classical economics and Marx explicitly rejected the labor theory of price (Gordon, Donald, F. What Was the Labor Theory of Value? American Economic Review, Vol. 49, No. 2, Papers and Proceedings of the Seventy-first Annual Meeting of the American Economic Association (May, 1959) , pp. 462-472 [1]). David Ricardo (April 18, 1772 – September 11, 1823), a political economist, is often credited with systematising economics, and was one of the most influential of the classical economists, along with Thomas Malthus, and Adam Smith. ...
The labor theory of value (LTV) is a theory in classical economics concerning the value of an exchangeable good or service. ...
Eugen von Böhm-Bawerk Eugen von Böhm-Bawerk (February 12, 1851 - August 27, 1914) made important contributions to the development of Austrian economics. ...
Principles of Political Economy and Taxation is the title of a book by David Ricardo on ecomonics. ...
In Karl Marxs economics the transformation problem is the problem of finding a general rule to transform the values of commodities (based on labour according to his labour theory of value) into the competitive prices of the marketplace. ...
Karl Heinrich Marx (May 5, 1818, Trier, Germany – March 14, 1883, London) was a German philosopher, political economist, and revolutionary. ...
A somewhat different theory of cost-determined prices is provided by the "neo-Ricardian school" of Piero Sraffa and his followers. Piero Sraffa. ...
The Polish economist Michał Kalecki [2] distinguished between sectors with "cost-determined prices" (such as manufacturing and services) and those with "demand-determined prices" (such as agriculture and raw material extraction). MichaÅ‚ Kalecki (22nd June 1899-18 April 1970) was one of the greatest Polish economists. ...
One might think of this theory as equivalent to modern theories of markup-pricing, full-cost pricing, or administrative pricing. Ever since Hall and Hitch, economists have found that the evidence gathered in surveys of businessmen support such theories.
Most contemporary economists probably accept neoclassical economics or mainstream economics. The non-substitution theorem is presented in graduate level microeconomics textbooks as a theorem of mainstream economics. Also many mainstream economists think they can justify theories of full-cost pricing within their theory. The majority of mainstream economists would probably then accept this theory as an element in their theory which does not give adequate attention to issues of consumer demand and marginal utility. Neoclassical economics refers to a general approach (a metatheory) to economics based on supply and demand which depends on individuals (or any economic agent) operating rationally, each seeking to maximize their individual utility or profit by making choices based on available information. ...
In economics, marginal utility is the additional utility (satisfaction or benefit) that a consumer derives from an additional unit of a commodity or service. ...
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