When a firm charges a price for its goods and services, if this price is less than the cost of production, they will suffer losses.
The profit that a company makes is calculated as:
= Selling price - Cost of production
If the selling price is less than the cost of production, the profit will be negative. A negative profit is the same as losses. This means that if a company charges lower than this cost of production, they will incur losses.
In conclusion, companies charge above their cost of production so as not to incur losses.
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