What is.. The difference between price and cost?
There is often confusion in the understanding of the difference between price and cost. For example, take the following two sentences quoted by students in an examination answer and see if you can spot where the mistakes are.
"If a business increases the cost, the profits will rise"
"If the business wants to increase its profits, it could increase its costs and hope to sell more"
Price refers to the amount of money that consumers have to give up to acquire a good or service.
If an MP3 player is priced at Â£60, it means I must give up that amount of money to acquire that product.
Cost refers to the amount paid to produce a good or service. The cost represents the sum of the value of the inputs in production - land, labour, capital and enterprise.
The image below shows how the price we pay is made up for a chocolate bar. This chocolate bar is priced at Â£1.30. The segments show an estimate of how this price might be arrived at.
- The raw materials will include the cocoa, sugar, milk, honey, hazelnuts, flavouring and colour that are used to make the chocolate bar.
- The capital will include all the buildings and factories that make up the Cadbury's business, the machinery, equipment used in the manufacture of the bar as well as all the vehicles and so on involved in the distribution of the finished product and the offices and administration buildings that support the business.
- Labour includes not only those who are involved directly in the making of the bars but all the sales staff, administration staff, management, marketing teams and so on that are employed by Cadbury.
- The profit is the reward for enterprise. It is the amount left over when all the costs have been paid.
- These represent the costs of production.
The price of this chocolate bar is the amount of money that I have to give up to buy. In this example, this is Â£1.30 as represented by the coins below.
In paying this price, I am sacrificing what else these coins could have bought.
Be careful, therefore, when saying, 'these new trainers cost me Â£60". What you should really be saying is: "The price I paid for these trainers was Â£60"!