No. of Recommendations: 2
To the supplier it is just another cost item, along with all their other costs and taxes and fees.
True.
The selling price of a product is determined by supply and demand, and has almost nothing to do with what it costs the seller to produce it.
This is also true. However, if the selling price is too low to make a reasonable profit, fewer sellers will be willing to produce it. In the limit, if it the price is too low to make any profit, the business will not exist.
A rational self-interested seller is already setting his price as high as he can
This is also true. But a rational self-interested seller doesn't set their supply as high as high as they can. They only set their supply as high as they can while also selling at a price that produces a reasonable profit.
<i?The seller basically decides to either take a lower profit or stop making & selling the product
Or the seller (or all the sellers collectively for commodity-like items) can choose to make fewer items, and then sell them at a higher price by moving to a different point on the the supply/demand curve. You can see this most clearly with pure commodities. Take oil for example, when oil prices are high (high is defined as "can produce a profit above what investors deem sufficient"), more oil wells come on line, and supply increases. When oil prices are low (low is defined as "can produce a profit below what investors deem sufficient") more oil wells are taken off line to reduce the supply.
And the same applies to non-commodities, though with a somewhat slower process. Look at auto manufacturing for example. When an auto company sees that they make $6000 per truck/SUV and only make $1000 per small sedan, they may choose to slow or stop the production of small sedans because the overall costs of making a sedan are not that much more than making a truck/SUV, and the overall G&A is the same, so it isn't really worth devoting expensive factories to small sedans that only produce a small profit.
