A price signal is

information Information is an abstract concept that refers to that which has the power to inform. At the most fundamental level information pertains to the interpretation of that which may be sensed. Any natural process that is not completely random, ...

conveyed to

consumer A consumer is a person or a group who intends to order, or uses purchased goods, products, or services primarily for personal, social, family, household and similar needs, who is not directly related to entrepreneurial or business activities. ...

s and

producer Producer or producers may refer to: Occupations *Producer (agriculture), a farm operator *A stakeholder of economic production *Film producer, supervises the making of films **Executive producer, contributes to a film's budget and usually does not ...

s, via the

price 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 situations, the price of production has a different name. If the product is a "good" in t ...

s offered or requested for, and the amount requested or offered of a product or service, which provides a signal to increase or decrease quantity supplied or quantity demanded. It also provides potential business opportunities. When a certain kind of product is in shortage supply and the price rises, people will pay more attention to and produce this kind of product. The information carried by prices is an essential function in the fundamental coordination of an economic system, coordinating things such as what has to be produced, how to produce it and what resources to use in its production. In mainstream (neoclassical) economics, under perfect competition relative prices signal to producers and consumers what production or consumption decisions will contribute to allocative efficiency. According to

Friedrich Hayek Friedrich August von Hayek ( , ; 8 May 189923 March 1992), often referred to by his initials F. A. Hayek, was an Austrian–British economist, legal theorist and philosopher who is best known for his defense of classical liberalism. Hayek ...

, in a system in which the knowledge of the relevant facts is dispersed among many people, prices can act to coordinate the separate actions of different people in the same way as subjective values help the individual to coordinate the parts of his plan.

Pricing power

Alternative theories include that prices reflect relative

pricing power In economics, market power refers to the ability of a firm to influence the price at which it sells a product or service by manipulating either the supply or demand of the product or service to increase economic profit. In other words, market powe ...

of producers and consumers. A

monopoly A monopoly (from Greek el, μόνος, mónos, single, alone, label=none and el, πωλεῖν, pōleîn, to sell, label=none), as described by Irving Fisher, is a market with the "absence of competition", creating a situation where a speci ...

may set prices so as to maximize monopoly profit, while a

cartel A cartel is a group of independent market participants who collude with each other in order to improve their profits and dominate the market. Cartels are usually associations in the same sphere of business, and thus an alliance of rivals. Mo ...

may engage in price fixing. Conversely, on the consumer side, a monopsony may negotiate or demand prices that do not reflect the cost of production. The

owned by an enterprise reflects the position of its products in the market. In this case, the price signal may no longer be able to affect such products.

Value

A long thread in economics (from Aristotle to classical economics to the present) distinguishes between exchange value, use value, price, and (sometimes) intrinsic value. It is frequently argued that the connection between price and other types of value is not as direct as suggested in the theory of price signals, other considerations playing a part.

Speculation

Financial speculation, particularly buying or selling assets with borrowed money, can move prices away from their economic fundamentals. Credit bubbles can sometimes distort the price signal mechanism, causing large-scale malinvestment and financial crises. Adherents of the Austrian economics attribute this phenomenon to the interference of

central bank A central bank, reserve bank, or monetary authority is an institution that manages the currency and monetary policy of a country or monetary union, and oversees their commercial banking system. In contrast to a commercial bank, a centra ...

ers, which they propose to eliminate by introducing full-reserve banking. By contrast, post-Keynesian economists such as Hyman Minsky have described it as a fundamental flaw of

capitalism Capitalism is an economic system based on the private ownership of the means of production and their operation for profit. Central characteristics of capitalism include capital accumulation, competitive markets, price system, private ...

, corrected by

financial regulation Financial regulation is a form of regulation or supervision, which subjects financial institutions to certain requirements, restrictions and guidelines, aiming to maintain the stability and integrity of the financial system. This may be handle ...

. Both schools have been the subject of renewed attention in the Western world since the financial crisis of 2007–2010.

Price discrimination

Firms use price discrimination to increase profits by charging different prices to different consumers or groups of consumers. Price discrimination may be regarded as an unfair practice used to drive out competitors.

Jonathan Nitzan Jonathan Nitzan is Professor of Political Economy at York University, Toronto, Canada. Work Nitzan is the co-author (with Shimshon Bichler) of ''Capital as Power: A Study of Order and Creorder'', published 2009. Their writings focus of the nature ...

and

Shimshon Bichler Shimshon Bichler is an educator who teaches political economy at colleges and universities in Israel. Along with Jonathan Nitzan, Bichler has created a power theory of capitalism and theory of differential accumulation in their analysis of the po ...

, ''Capital as Power: A Study of Order and Creorder'', Routledge, 2009, p. 228.

References

{{Microeconomics Pricing Information

Pricing power

Value

Speculation

Price discrimination

See also

Further reading

References