# Why sell capital at a price higher than what it costs?

1. Apr 1, 2006

### francisco

to make a profit means to sell goods at a price higher than what i pay to produce the goods.

the provider of the means (capital) to produce the goods sells the capital at a price higher than what the provider pays to provide the capital. why?

2. Apr 1, 2006

### Pengwuino

You need to rephrase this question, i can't make heads or tails of it.

3. Apr 1, 2006

### Staff: Mentor

I'm not sure what you mean by selling capital, but people sell things (anything) at a profit because if you don't make a profit, there isn't any point in selling it. It only helps you to sell something if you make money by selling it.

4. Apr 1, 2006

### Tojen

Division of labour. If I make cars at a price you're willing to pay (which includes all the costs including loan payments, plus some more for profit), then you don't have to make your own car. You're then free to build houses for a profit so I don't have to build my own. Probably everything you own was made by someone else so you could spend your time working at your own job. We pay for not having to make things ourselves.

5. Apr 1, 2006

### dav2008

I think Tojen cleared up what the original question actually is.

From what I understand the question is: "If it costs a certain price to manufacture a good, why is it being sold on the market at a higher price if people can just produce it for themselves at the original price"

6. Apr 2, 2006

### Pengwuino

Well the answer to this question is normally that people can't produce things for themselves at the original prices. The more industralization, the more you are able to cheaply produce things. Look at cars for example, if you included your own labor at competative prices, you would never be able to assemble a say, Ford Explorer by yourself at any decent price or in any decent time. When you're able to buy a $2 billion plant that can pump out a Ford Explorer for$10,000 and in 1 day, you're building trucks an incredible efficiency that a single person just can't match with a toolshop and the local hardware store.

It's just that mechanization and industralization makes it so much easier to build something at such a great efficiency that single person's can't even dream of replicating them. When you start talking about electronics, it's just insane to think a single person can create a dvd-player for $75 with stuff readily available to him in his city that equals the quality of a manufactored good. 7. Apr 4, 2006 ### selfAdjoint Staff Emeritus The providers of the capital are just another set of agents in the economy, and must make a profit in order to continue in business just like the others. Therefore they impose a markup on what they "sell", which you can see in the spread between interest charged on loans and interest paid on savings. 8. May 18, 2006 ### seb_mac One aspect that is usually overlooked is the value of innovation. The person who actually invents something, or simply has the idea to do commerce in a certain place deserves, in the economic sense, to be remunerated for it. There is an economic value associated to innovation and entrepreneurship, one to encourage future innovations, and two because consummers are willing and able to pay more than the value of the materials that make the good or service possible. This is actually one of the main economic critic of Marx's ideas which led to communism. If the innovators are not remunerated for their ideas, and the entrepreneurs are not compensatede for the risks they are taking, then global welfare is directly affected by the economic "stagnation" that ensues. This is a great discussion by the way! 9. May 18, 2006 ### 0TheSwerve0 Sometimes I wish I could just barter my stuff directly. Don't want to use ebay though, too confusing the first time I checked it out. 10. Nov 4, 2006 ### myoho.renge.kyo that's nice! i hope it is ok with you to write it like this: Take my love, Take my land, Take me where I cannot stand. I don't care, I'm still free, you can't take period of time from me. Take me out to the black, tell them I ain't comin' back. Burn the land and boil the sea, you can't take the period of time from me. There's no place I can be, since I found Serenity, but you can't take the period of time from me... 11. Nov 15, 2006 ### JierenChen The easy answer to francisco's question is because they can. Why would you not want to sell your product for more when you can? Also, just a silly rant but I really hate the concept of production as value-added. It's such a macroeconomic (blaaarrgh) idea that muddles complex economic, social, political, and cultural interactions into a big bland streak of aggregate demand and supply. This is especially true of the economics of innovation and ideas. Granted, money is a great incentive to make great things, but how many times have you heard the inventor, artist, musician say that it wasn't for the money. After all, the best tank design in World War II was the T-34, produced by the Soviets. Just something to think about, I guess. 12. Dec 28, 2006 ### EnumaElish I have just realized that this question is asking something different than what I first thought it was asking. In a competitive market, and in the long run, price = (marginal) cost. Not only each factor of production is paid its "cost," but all goods are sold at cost. In non-competitive markets, or in the short run, price may exceed cost. So the answer to your question is price > cost in the long run (i.e. persistently) because market failures prevent the markets from being competitive. For example, market power is a market failure. If a firm has market power, then it has the ability to sell at a price that persistently exceeds cost. Last edited: Dec 28, 2006 13. May 23, 2007 ### mulp One doesn't sell capital; you sell goods and services. Capital is the investment of sacrificed consumption into something which will increase productivity. (You would not use a machine to make 9 widgets an hour if not using the machine you can produce 10 widgets.) Capital in the real world often costs more than it is worth; most small businesses depend on the low return on invested HUMAN capital. The owner will labor for low wage rates for his skills and critical contribution, and puts much of his accumulated savings at risk of loss, and seldom reaps a return better than merely selling his labor only. 14. May 23, 2007 ### Surrealist Ask China.... The government of China has been subsidizing its industries so as to gain a global monopoly over certain world markets. Why do you think you can buy a TV at WalMart for$20? It's because China's government is sucking up the losses so that soon they will be the only country with the infrastructure for making certain consumer goods.

15. May 24, 2007

### nabuco

This is actually an interesting question, and the answers are not the obvious ones ("because they can" sounds good, but it leads to another question which is essentially the original question rephrased)

In economic theory price, value, and cost are three different things. The correct answer to the question is that people/corporations can sell a thing for a price that is higher than its cost, but they cannot sell it for a price that is higher than its value. Making a profit means simply producing something at a cost that is lower than its value.

Notice that is not always the case that you can make a profit by selling/manufacturing something. There are things whose value is lower than the production cost for the current market conditions. Those things are never sold for a profit, but sometimes are sold for a loss for reasons that have nothing to do with economics.

16. May 24, 2007

### honestrosewater

I have wondered something similar to the OP, though my question was more about ethics than economics, and my answer was something like "greed", which is why I wasn't going to say anything. But this is an interesting perspective and is making me reconsider. It is possible to make making profit into a certain kind of challenge, or problem solving. I suppose a view like that has been put forward before, but perhaps I never really got it. (Of course, it doesn't help my ethical concerns, as it just moves it to whether the determination of value is ethical.) Thanks.

17. May 24, 2007

### Staff: Mentor

There are a lot of synonyms for "greed" that mean essentially the same thing, but don't have quite the same negative connotation.

nabuco's point, however, is tempered by the fact that the producer of the product plays a big role in determining the value of the product, though that is market dependent.

18. May 24, 2007

### honestrosewater

Well, the negative connotations are why I hesitated to mention it. That was the only word that came to mind. I don't think that greed, or whatever, is necessarily bad. I have something like an Aristotelian golden mean approach to these things myself. But anywho...

How so?

It seems to me that at least sometimes, and perhaps these are the cases that stand out to me, making a profit is taking advantage of fortune, luck, happenstance, or whatever you want to call it, without regard for what is fair.