How do changes in production costs affect prices?

Assessing the effects of changes in production costs is vital in understanding the prices we face as consumers, as well as levels of inflation.However, standard market models struggle to explain why prices tend to rise when costs increase more quickly than they fall when costs decrease. Luke Garrod, Matthew Olczak and Chris Wilson investigate

Figure 1 A profit-maximising monopolist

prices and costs, market structure, collusion in oligopoly

Firms are frequently faced with changing production costs. In recent months, these have been affected by the high volatility in oil prices and the costs of energy. Production costs can also change due to variation in the price of raw materials, exchange rates, interest rates or even government policy, such as changes in the levels of taxes or the minimum wage.