Price

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The competitive price system according to Paul Samuelson The competitive price system adapted from Samuelson, 1961.jpg
The competitive price system according to Paul Samuelson
Prices for fruit at a market in Israel Talpiyot Market.jpg
Prices for fruit at a market in Israel
A price display for a tagged clothes item at Kohl's Wireless in-store price display at a clothing retailer in NJ.jpg
A price display for a tagged clothes item at Kohl's
Outdoor signage in Taiwan showing prices CPCCT Wenling Road Station fuel price sign 20110313.jpg
Outdoor signage in Taiwan showing prices

A price is the (usually not negative) quantity of payment or compensation given by one party to another in return for goods or services. In some situation, the price of production has a different name. If the product is a "good" in the commercial exchange, the payment for this product will likely be called its "price". However, if the product is "service", there will be other possible names for this product's name. For example, the graph on the bottom will show some situations [1] A good's price is influenced by production costs, supply of the desired item, and demand for the product. A price may be determined by a monopolist or may be imposed on the firm by market conditions.

Contents

Price can be quoted to currency,quantities of goods or vouchers

In many financial transactions, it is customary to quote prices in other ways. The most obvious example is in pricing a loan, when the cost will be expressed as the percentage rate of interest. The total amount of interest payable depends upon credit risk, the loan amount and the period of the loan. Other examples can be found in pricing financial derivatives and other financial assets. For instance the price of inflation-linked government securities in several countries is quoted as the actual price divided by a factor representing inflation since the security was issued.

"Price" sometimes refers to the quantity of payment requested by a seller of goods or services, rather than the eventual payment amount. This requested amount is often called the asking price or selling price, while the actual payment may be called transaction price or traded price. Likewise, the bid price or buying price is the quantity of payment offered by a buyer of goods or services, although this meaning is more common in asset or financial markets than in consumer markets.

Economic price theory asserts that in a free market economy the market price reflects interaction between supply and demand: [2] the price is set so as to equate the quantity being supplied and that being demanded. In turn, these quantities are determined by the marginal utility of the asset to different buyers and to different sellers. Supply and demand, and hence price, may be influenced by other factors, such as government subsidy or manipulation through industry collusion.

When a raw material or a similar economic good for sale at multiple locations, the law of one price is generally believed to hold. This essentially states that the cost difference between the locations cannot be greater than that representing shipping, taxes, other distribution costs and more.

Functions of prices

According to Milton Friedman, price has five functions in a free-enterprise exchange economy which is characterized by private ownership of the means of production: [3]

Price and value

The paradox of value was observed and debated by classical economists. Adam Smith described what is now called the diamond – water paradox: diamonds command a higher price than water, yet water is essential for life and diamonds are merely ornamentation. Use value was supposed to give some measure of usefulness, later refined as marginal benefit while exchange value was the measure of how much one good was in terms of another, namely what is now called relative price.[ dubious ]

Negative prices

Negative prices are very unusual but possible under certain circumstances. Effectively, the owner or producer of an item pays the "buyer" to take it off their hands.

In April 2020, for the first time in history, due to the global health/economic crisis situation, price of (futures contract for) West Texas Intermediate benchmark crude oil turned negative, with a barrel of oil at -$37.63 a barrel, a one-day drop of $55.90, or 306%, according to Dow Jones Market Data. "Negative prices means someone with a long position in oil would have to pay someone to take that oil off of their hands. Why would they do that? The main reason is a fear that if forced to take delivery of crude on the expiration of the May oil contract, there would be nowhere to put it as a glut of crude fills up available storage." [4] In a sense the price is still positive, just the direction of payment reverses, i.e. in this case you are paid to take some goods.

Negative interest rates are a similar concept.

Austrian School theory

One solution offered to the paradox of the value is through the theory of marginal utility proposed by Carl Menger, one of the founders of the Austrian School of economics.

As William Barber put it, human volition, the human subject, was "brought to the centre of the stage" by marginalist economics, as a bargaining tool. Neoclassical economists sought to clarify choices open to producers and consumers in market situations, and thus "fears that cleavages in the economic structure might be unbridgeable could be suppressed". [5]

Without denying the applicability of the Austrian theory of value as subjective only, within certain contexts of price behavior, the Polish economist Oskar Lange felt it was necessary to attempt a serious integration of the insights of classical political economy with neo-classical economics. This would then result in a much more realistic theory of price and of real behavior in response to prices. Marginalist theory lacked anything like a theory of the social framework of real market functioning, and criticism sparked off by the capital controversy initiated by Piero Sraffa revealed that most of the foundational tenets of the marginalist theory of value either reduced to tautologies, or that the theory was true only if counter-factual conditions applied.[ citation needed ]

One insight often ignored in the debates about price theory is something that businessmen are keenly aware of: in different markets, prices may not function according to the same principles except in some very abstract (and therefore not very useful) sense. From the classical political economists to Michał Kalecki it was known that prices for industrial goods behaved differently from prices for agricultural goods, but this idea could be extended further to other broad classes of goods and services.[ citation needed ]

Price as productive human labour time

Marxists assert that value derives from the volume of socially necessary labour time exerted in the creation of an object. This value does not relate to price in a simple manner, and the difficulty of the conversion of the mass of values into the actual prices is known as the transformation problem. However, many recent Marxists deny that any problem exists. Marx was not concerned with proving that prices derive from values. In fact, he admonished the other classical political economists (like Ricardo and Smith) for trying to make this proof. Rather, for Marx, price equals the cost of production (capital-cost and labor-costs) plus the average rate of profit. So if the average rate of profit (return on capital investment) is 22% then prices would reflect cost-of-production plus 22%. The perception that there is a transformation problem in Marx stems from the injection of Walrasian equilibrium theory into Marxism where there is no such thing as equilibrium.[ citation needed ]

Confusion between prices and costs of production

Price is commonly confused with the notion of cost of production, as in "I paid a high cost for buying my new plasma television"; but technically these are different concepts. Price is what a buyer pays to acquire products from a seller. Cost of production concerns the seller's expenses (e.g., manufacturing expense) in producing the product being exchanged with a buyer. For marketing organizations seeking to make a profit, the hope is that price will exceed cost of production so that the organization can see financial gain from the transaction.

Finally, while pricing is a topic central to a company's profitability, pricing decisions are not limited to for-profit companies. The behavior of non-profit organizations, such as charities, educational institutions and industry trade groups, also involve setting prices. [6] :160–65 For instance, charities seeking to raise money may set different "target" levels for donations that reward donors with increases in status (e.g., name in newsletter), gifts or other benefits; likewise educational and cultural nonprofits often price seats for events in theatres, auditoriums and stadiums. Furthermore, while nonprofit organizations may not earn a "profit", by definition, it is the case that many nonprofits may desire to maximize net revenue—total revenue less total cost—for various programs and activities, such as selling seats to theatrical and cultural performances. [6] :183–94

Price point

The price of an item is also called the "price point", especially if it refers to stores that set a limited number of price points. For example, Dollar General is a general store or "five and dime" store that sets price points only at even amounts, such as exactly one, two, three, five, or ten dollars (among others). Other stores have a policy of setting most of their prices ending in 99 cents or pence. Other stores (such as dollar stores, pound stores, euro stores, 100-yen stores, and so forth) only have a single price point ($1, £1, €1, ¥100), but in some cases, that price may purchase more than one of some very small items. [7]

Market price

Some alternative terms for price by Schindler, Robert M Figure 1 some terms used to mean Price.png
Some alternative terms for price by Schindler, Robert M

In economics, the market price is the economic price for which a good or service is offered in the marketplace. It is of interest mainly in the study of microeconomics. Market value and market price are equal only under conditions of market efficiency, equilibrium, and rational expectations. Market price is measured during a specific period of time and is greatly affected by the supply and demand for a good or service. For example, if demand for a good increases and supply of the good is held constant, the price for the good will rise in a marketplace with open competition. [8]

On restaurant menus, the market price (often abbreviated to m.p. or mp) is written instead of a specific price, meaning "price of dish depends on market price of ingredients, and price is available upon request", and is particularly used for seafood, notably lobsters and oysters.[ citation needed ]

Other terms

Basic Price: It is the amount that producer receive from buyer for a unit of good or service produced minus any taxes payable and plus subsidies payable on that unit as the result of its production or sales. It does not include any producer transport charges which involves separately. [9]

Producer Price Index: It measures the average change of the selling price of domestic producers' products over time. [10]

Purchase Price: It refers to the amount paid by the purchaser for receiving a unit of goods or services at the time and place required by the purchaser and any deductible taxes will not be included. The purchase price also include any transport charge for purchase to pick up the goods to specific location in the required time. [11]

Price optimization is the use of mathematical techniques by a company to determine how customers will respond to different prices for its products and services through different channels.


See also

Notes

  1. Schindler, Robert M. (2012). Pricing Strategies: A Marketing Approach. Thousand Oaks, California: SAGE. pp. 1–3. ISBN   978-1-4129-6474-6.
  2. Banton, Caroline. "Theory of Price Definition". Investopedia. Retrieved 2021-04-25.
  3. Milton Friedman, “Lerner on the Economics of Control”, in Milton Friedman (Ed.), Essays in Positive Economics. Chicago: University of Chicago Press, 1953, pp. 304.
  4. Watts, William. "Why oil prices just crashed into negative territory — 4 things investors need to know". MarketWatch. Retrieved 2020-05-14.
  5. Barber, William (2010). A History of Economic Thought. Middletown, CT: Wesleyan University Press. p. 215. ISBN   9780819569387. fears that cleavages in the economic structure might be unbridgeable could be suppressed
  6. 1 2 Heyne, Paul; Boettke, Peter J.; Prychitko, David L. (2014). The Economic Way of Thinking (13th ed.). Pearson. ISBN   978-0-13-299129-2.
  7. "What's a price point?". brainbi.
  8. Vaggi, G. (2008), Palgrave Macmillan (ed.), "Market Price", The New Palgrave Dictionary of Economics, London: Palgrave Macmillan UK, pp. 1–2, doi:10.1057/978-1-349-95121-5_1251-2, ISBN   978-1-349-95121-5 , retrieved 2021-11-20
  9. Statistics, c=AU; o=Commonwealth of Australia; ou=Australian Bureau of (2015-06-25). "Glossary - Glossary". www.abs.gov.au. Retrieved 2021-04-25.
  10. "Producer Price Index (PPI)". www.bls.gov. Retrieved 2021-04-25.
  11. Statistics, c=AU; o=Commonwealth of Australia; ou=Australian Bureau of (2015-06-25). "Glossary - Glossary". www.abs.gov.au. Retrieved 2021-04-25.

Related Research Articles

Economics Social science

Economics is "the social science that studies the production, distribution, and consumption of goods and services."

In economics, factors of production, resources, or inputs are what is used in the production process to produce output—that is, finished goods and services. The utilized amounts of the various inputs determine the quantity of output according to the relationship called the production function. There are four basic resources or factors of production: land, labour, capital and entrepreneur. The factors are also frequently labeled "producer goods or services" to distinguish them from the goods or services purchased by consumers, which are frequently labeled "consumer goods".

The labor theory of value (LTV) is a theory of value that argues that the economic value of a good or service is determined by the total amount of "socially necessary labor" required to produce it.

Microeconomics Behavior of individuals and firms

Microeconomics is a branch of mainstream economics that studies the behavior of individuals and firms in making decisions regarding the allocation of scarce resources and the interactions among these individuals and firms. Microeconomics focuses on the study of individual markets, sectors, or industries as opposed to the national economy as whole, which is studied in macroeconomics.

Neoclassical economics is an approach to economics in which the production, consumption and valuation (pricing) of goods and services are observed as driven by the supply and demand model. According to this line of thought, the value of a good or service is determined through a hypothetical maximization of utility by income-constrained individuals and of profits by firms facing production costs and employing available information and factors of production. This approach has often been justified by appealing to rational choice theory, a theory that has come under considerable question in recent years.

In economics, specifically general equilibrium theory, a perfect market, also known as an atomistic market, is defined by several idealizing conditions, collectively called perfect competition, or atomistic competition. In theoretical models where conditions of perfect competition hold, it has been demonstrated that a market will reach an equilibrium in which the quantity supplied for every product or service, including labor, equals the quantity demanded at the current price. This equilibrium would be a Pareto optimum.

Supply and demand Economic model of price determination in microeconomics

In microeconomics, supply and demand is an economic model of price determination in a market. It postulates that, holding all else equal, in a competitive market, the unit price for a particular good, or other traded item such as labor or liquid financial assets, will vary until it settles at a point where the quantity demanded will equal the quantity supplied, resulting in an economic equilibrium for price and quantity transacted. It forms the theoretical basis of modern economics.

Commodity Fungible item produced to satisfy wants or needs

In economics, a commodity is an economic good, usually a resource, that has full or substantial fungibility: that is, the market treats instances of the good as equivalent or nearly so with no regard to who produced them.

A variety of measures of national income and output are used in economics to estimate total economic activity in a country or region, including gross domestic product (GDP), gross national product (GNP), net national income (NNI), and adjusted national income. All are specially concerned with counting the total amount of goods and services produced within the economy and by various sectors. The boundary is usually defined by geography or citizenship, and it is also defined as the total income of the nation and also restrict the goods and services that are counted. For instance, some measures count only goods & services that are exchanged for money, excluding bartered goods, while other measures may attempt to include bartered goods by imputing monetary values to them.

Marginalism is a theory of economics that attempts to explain the discrepancy in the value of goods and services by reference to their secondary, or marginal, utility. It states that the reason why the price of diamonds is higher than that of water, for example, owes to the greater additional satisfaction of the diamonds over the water. Thus, while the water has greater total utility, the diamond has greater marginal utility.

Law of value

The law of the value of commodities, known simply as the law of value, is a central concept in Karl Marx's critique of political economy first expounded in his polemic The Poverty of Philosophy (1847) against Pierre-Joseph Proudhon with reference to David Ricardo's economics. Most generally, it refers to a regulative principle of the economic exchange of the products of human work, namely that the relative exchange-values of those products in trade, usually expressed by money-prices, are proportional to the average amounts of human labor-time which are currently socially necessary to produce them within the capitalist mode of production.

Market (economics) System in which parties engage in transactions according to supply and demand

A market is a composition of systems, institutions, procedures, social relations or infrastructures whereby parties engage in exchange. While parties may exchange goods and services by barter, most markets rely on sellers offering their goods or services to buyers in exchange for money. It can be said that a market is the process by which the prices of goods and services are established. Markets facilitate trade and enable the distribution and allocation of resources in a society. Markets allow any tradeable item to be evaluated and priced. A market emerges more or less spontaneously or may be constructed deliberately by human interaction in order to enable the exchange of rights of services and goods. Markets generally supplant gift economies and are often held in place through rules and customs, such as a booth fee, competitive pricing, and source of goods for sale.

In economics, economic value is a measure of the benefit provided by a good or service to an economic agent. It is generally measured relative to units of currency, and the interpretation is therefore "what is the maximum amount of money a specific actor is willing and able to pay for the good or service"?

In economics, partial equilibrium is a condition of economic equilibrium which analyzes only a single market, ceteris paribus except for the one change at a time being analyzed. In general equilibrium analysis, on the other hand, the prices and quantities of all markets in the economy are considered simultaneously, including feedback effects from one to another, though the assumption of ceteris paribus is maintained with respect to such things as constancy of tastes and technology.

In classical political economy and especially Karl Marx's critique of political economy, a commodity is any good or service produced by human labour and offered as a product for general sale on the market. Some other priced goods are also treated as commodities, e.g. human labor-power, works of art and natural resources, even though they may not be produced specifically for the market, or be non-reproducible goods. This problem was extensively debated by Adam Smith, David Ricardo, and Karl Rodbertus-Jagetzow, among others. Value and price are not equivalent terms in economics, and theorising the specific relationship of value to market price has been a challenge for both liberal and Marxist economists.

In economics, factor payments are the income people receive for supplying the factors of production: land, labor, capital or entrepreneurship.

In any technical subject, words commonly used in everyday life acquire very specific technical meanings, and confusion can arise when someone is uncertain of the intended meaning of a word. This article explains the differences in meaning between some technical terms used in economics and the corresponding terms in everyday usage.

The Cambridge capital controversy, sometimes called "the capital controversy" or "the two Cambridges debate", was a dispute between proponents of two differing theoretical and mathematical positions in economics that started in the 1950s and lasted well into the 1960s. The debate concerned the nature and role of capital goods and a critique of the neoclassical vision of aggregate production and distribution. The name arises from the location of the principals involved in the controversy: the debate was largely between economists such as Joan Robinson and Piero Sraffa at the University of Cambridge in England and economists such as Paul Samuelson and Robert Solow at the Massachusetts Institute of Technology, in Cambridge, Massachusetts, United States.

In Marxian economics, surplus value is the difference between the amount raised through a sale of a product and the amount it cost to the owner of that product to manufacture it: i.e. the amount raised through sale of the product minus the cost of the materials, plant and labour power. The concept originated in Ricardian socialism, with the term "surplus value" itself being coined by William Thompson in 1824; however, it was not consistently distinguished from the related concepts of surplus labor and surplus product. The concept was subsequently developed and popularized by Karl Marx. Marx's formulation is the standard sense and the primary basis for further developments, though how much of Marx's concept is original and distinct from the Ricardian concept is disputed. Marx's term is the German word "Mehrwert", which simply means value added, and is cognate to English "more worth".

This glossary of economics is a list of definitions of terms and concepts used in economics, its sub-disciplines, and related fields.

References

Further reading