March 24, 2022 • 3 minute read
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Formulas used in all businesses.
A price, as already mentioned earlier, is the monetary unit we use to objectively measure and express the value of a product. As you are no doubt familiar with, it is written as a currency symbol followed by a number. For example: $1.00
All prices initially begin as bids. It does not matter if you are at the grocery store or the gallery auction. A price begins as a proposition, a test of the product’s value. Only after a price is paid is a product’s value determined. Never before. The moment of exchange is when the value of the product is no longer a proposal but instead an established fact. Price is present tense.
A cost is the monetary unit we use to objectively measure the seller’s expense of creating a product or the buyer's expense of acquiring it. Cost is past tense.
All costs are prices. But not all prices are costs.
A price added to itself as many times as the quantity of a product is called a revenue, or put more simply: price multiplied by quantity equals revenue.
Price x Quantity = Revenue
Some people may imagine a revenue as a stream of money flowing in one direction, but this is only half the picture. A revenue is more accurately portrayed as a two-way lane. The price—or flow of money—moves toward the seller, while the quantity—or flow of product—simultaneously moves in the opposite direction toward the buyer.
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A cost subtracted from a revenue is called a profit, or more simply: revenue minus cost equals profit.
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Revenue - Cost = Profit
The main motivation of a monopoly and oligopoly are to maximize their profit through an unnaturally high price. This price will be found on their product's sale tags. Likewise, the main motivation of a monopsony and oligopsony are to maximize their profit through an unnaturally low cost. This cost will be found in the compensation paid to its suppliers or the wages of its workers.
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By law workers are entitled to the wages of their labor or work. And business owners are entitled to the profits of their inventory or stock. It should be noted here that “stock” has a dual definition.
In his writings, Adam Smith referred to stock as an accumulation of stored product—such as could be found in a warehouse. But stock also evolved to mean a certificate that granted ownership of that storage. To own this inventory is to control the business, and so stock came to be known as the legal document which allocated a percentage of ownership or “share” in a business; hence the Wall Street terms “stock market” and “buying shares.”
The profits of stock are often higher than the wages of labor. But by the definition of our formula, Revenue – Cost = Profit, a profit can be either positive or negative—a big award or a major risk. This dynamic largely depends on where the business owners and workers are located along the market spectrum. The closer a business owner is to perfect competition the more likely they are to experience both positive and negative profits.
Broadly speaking, new oligopolies and oligopsonies enjoy more positive profit while old oligopolies and oligopsonies suffer more negative profit. An old oligopoly or oligopsony suffering a string of negative profit will sell away their assets to another business and then it either dissolves, or alternatively, gets absorbed into the other business entity—which is why we often see merged business names. (JP Morgan Chase, AOL Time Warner, Mercedes-Benz, etc.) Mergers and acquisitions act as a buffer against these negative profits.
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