> That's not a business 101.
replyIt kinda is, but obscured by GP's formula.
More simply; if it costs you $X to produce a product and the market is willing to pay $Y (which has no relation to $X), why would you price it as a function of $X?
If it costs me $10 to make a widget and the market is happy to pay $100, why would I base my pricing on $10 * 1.$MARGIN?
Exactly. The mechanism by which the price ends up as X plus margin is just competition. Others enter the market and compete with you until the returns are driven down to the rental rate of capital. Any barriers to entry result in higher margins.
replyBut that is an equilibrium result, and famously does not apply to monopolies, where elasticity of substitution will determine the premium over the rental rate of capital.