Some economic fallacies don’t die easily. Take the belief that the only determinant of a market price is the cost of producing the particular good. When a price rises or falls, it is commonly assumed that the item’s cost of production must have gone up or down. And there is a tendency to condemn price increases which are not apparently due to higher production costs.
But market prices are not mere reflectors of production costs….
What does determine [prices]… is competition among consumers for the available supply. An increased demand would cause the price to be bid up. A smaller available quantity would further intensify consumer’s bidding. Conversely, a diminished demand or an increased supply would weaken consumers’ competition and cause the price to fall.
There are thus two factors which determine a market price: consumers’ demand and the available supply. Either or both can change without any change in the cost of production…
The lesson is clear. Prices move up or down in order to ration the existing supply among those who demand it. And market-clearing prices can be very different for the same good at different times or in different locations–even though production costs are identical. So long-distance calls are cheaper at night; matinees are cheaper than evening performances; early-bird restaurant specials are less expensive; and U-Haul trucks from Detroit to Houston were much higher priced than the same trucks from Houston to Detroit.
Production costs do influence market prices, but only to the extent that these costs affect the available supply. It is that supply and consumers’ demand which are the real moving forces behind market prices.
Bill Allen
Utopia, you are standing in it! 
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