Ineconomics, thecost-of-production theory of value is the theory that the price of an object or condition is determined by the sum of the cost of the resources that went into making it. The cost can comprise any of thefactors of production (including labor, capital, or land) andtaxation.
The theory makes the most sense under assumptions ofconstant returns to scale and the existence of just one non-produced factor of production. With these assumptions, minimal price theorem, a dual version of the so-called non-substitution theorem by Paul Samuelson, holds.[1]: 73, 75 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.
Historically, the best-known proponent of such theories is probablyAdam Smith.[citation needed]Piero Sraffa, in his introduction to thefirst volume of the "Collected Works of David Ricardo", referred to Smith's "adding-up" theory. Smith contrastednatural prices withmarket price. Smith theorized that market prices would tend toward natural prices, where outputs would stand 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 laterclassical economists, with the Ricardo-Malthus-West theory of rent.)
David Ricardo mixed this cost-of-production theory of prices with thelabor theory of value, as that latter theory was understood byEugen von Böhm-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 hisPrinciples of Political Economy and Taxation, but contextualizes it as only relating to commodities with elastic supply. Taknaga advances a new interpretation that Ricardo had cost-of-production theory of value from the start and presents a more coherent interpretation based on texts ofPrinciples of Political Economy and Taxation.[2] This alleged refutation leads to what later became known as thetransformation problem.Karl Marx later takes up that theory in the first volume ofCapital, 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[3]([1]).
A somewhat different theory of cost-determined prices is provided by the "neo-Ricardian School"[2] ofPiero Sraffa and his followers. Yoshnori Shiozawa presented a modern interpretation of Ricardo's cost-of-production theory of value.[4]
The Polish economistMichał Kalecki[3] 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).
Market price is a familiar economic concept: it is the price that a good or service is offered at, or will fetch, in the marketplace. It is of interest mainly in the study of microeconomics. Market value and market price are equal only under conditions of market efficiency, equilibrium, andrational expectations.
In economics,returns to scale andeconomies of scale are related terms that describe what happens as the scale of production increases. They are different, non-interchangeable concepts.
The labor theories of value are economic theories according to which the true values of commodities are related to the labor needed to produce them.
There are many accounts of labor value, with the common element that the "value" of an exchangeable good or service is, or ought to be, or tends to be, or can be considered as, equal or proportional to the amount of labor required to produce it (including the labor required to produce the raw materials and machinery used in production).
Different labor theories of value prevailed among classical economists through the mid-19th century. This theory is especially associated with Adam Smith and David Ricardo. Since that time, it has been most often associated with Marxian economics, while among modern mainstream economists it is considered to be superseded by the marginal utility approach.
Taxes andsubsidies change the price of goods and services. A marginal tax on the sellers of a good will shift the supply curve to the left until the vertical distance between the two supply curves is equal to the per unit tax; other things remaining equal, this will increase theprice paid by the consumers (which is equal to the new market price) and decrease the price received by the sellers. Marginal subsidies on production will shift the supply curve to the right until the vertical distance between the two supply curves is equal to the per unit subsidy; other things remaining equal, this will decrease price paid by the consumers (which is equal to the new market price) and increase the price received by the producers.