32.1 – Introduction to Costing and Pricing in Going Concerns

Ledger from a German general store, 1828. (Praefcke, Public Domain).

Earlier chapters in this text, particularly “Cost Assumptions for Profit Maximizing Firms,” introduced the basic orthodox economic theory of how firms make decisions in the context of the market structures in which they operate and the implications thereof. Importantly, from that perspective firms are profit maximizers.  In the short run, this generally takes the form of producing a quantity where marginal cost equals marginal revenue, and in the long run it means entering markets with positive economic profits and exiting those with negative economic profits. And, just as importantly, those chapters showed why orthodox economists believe that a perfectly competitive market helps to ensure the efficient allocation of society’s scarce resources, as well as why a non-competitive market usually does not.

In this chapter and the next, however, you will be learning about an alternative, heterodox perspective on these topics. Here, firms are not assumed to maximize profits (indeed, in the next section you’ll see that it may not even be possible for them to do so). Instead, businesses in modern capitalist economies will be treated as going concerns, whose primary interest is in survival (and usually also growth) rather than maximum profits. From this view, businesses do not simply solve a formula for maximum profits; they actively construct the very notion of costs, and they set their prices in the context of their wider goals. Hence, the heterodox perspective is less about costs and prices as it is about costing and pricing.