In economics, the cost-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 compose any of the factors of production (including labor, capital, or land) and taxation.
The theory makes the most sense under assumptions of constant returns to scale and the existence of just one non-produced factor of production. These are the assumptions of the so-called non-substitution theorem. 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.
Read more about Cost-of-production Theory Of Value: Historical Development of Theory, Market Price, Labor Theory of Value, Taxes and Subsidies
Famous quotes containing the word theory:
“There is in him, hidden deep-down, a great instinctive artist, and hence the makings of an aristocrat. In his muddled way, held back by the manacles of his race and time, and his steps made uncertain by a guiding theory which too often eludes his own comprehension, he yet manages to produce works of unquestionable beauty and authority, and to interpret life in a manner that is poignant and illuminating.”
—H.L. (Henry Lewis)