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. T ...

s and producers, 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 the c ...

s offered or requested for, and the

amount Quantity or amount is a property that can exist as a multitude or magnitude, which illustrate discontinuity and continuity. Quantities can be compared in terms of "more", "less", or "equal", or by assigning a numerical value multiple of a unit ...

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 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 Economic model, theoret ...

relative prices A relative price is the price of a commodity such as a Good (economics), good or Service (economics), service in terms of another; i.e., the ratio of two prices. A relative price may be expressed in terms of a ratio between the prices of any two ...

signal to producers and consumers what

production Production may refer to: Economics and business * Production (economics) * Production, the act of manufacturing goods * Production, in the outline of industrial organization, the act of making products (goods and services) * Production as a stati ...

consumption Consumption may refer to: *Resource consumption *Tuberculosis, an infectious disease, historically * Consumption (ecology), receipt of energy by consuming other organisms * Consumption (economics), the purchasing of newly produced goods for curren ...

decisions will contribute to

allocative efficiency Allocative efficiency is a state of the economy in which production is aligned with consumer preferences; in particular, every good or service is produced up to the point where the last unit provides a marginal benefit to consumers equal to the mar ...

. 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. Haye ...

, 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 language, 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 situati ...

may set prices so as to maximize

monopoly profit Monopoly profit is an inflated level of profit due to the monopolistic practices of an enterprise.Bradley R. Chiller, "Essentials of Economics", New York: McGraw-Hill, Inc., 1991. Basic classical and neoclassical theory Traditional economics sta ...

, 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. Mos ...

may engage in

price fixing Price fixing is an anticompetitive agreement between participants on the same side in a market to buy or sell a product, service, or commodity only at a fixed price, or maintain the market conditions such that the price is maintained at a given ...

. Conversely, on the consumer side, a

monopsony In economics, a monopsony is a market structure in which a single buyer substantially controls the market as the major purchaser of goods and services offered by many would-be sellers. The microeconomic theory of monopsony assumes a single entity ...

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 In finance, speculation is the purchase of an asset (a commodity, good (economics), goods, or real estate) with the hope that it will become more valuable shortly. (It can also refer to short sales in which the speculator hopes for a decline i ...

, particularly buying or selling assets with borrowed money, can move prices away from their economic fundamentals.

Credit bubble An economic bubble (also called a speculative bubble or a financial bubble) is a period when current asset prices greatly exceed their intrinsic valuation, being the valuation that the underlying long-term fundamentals justify. Bubbles can be c ...

s can sometimes distort the price signal mechanism, causing large-scale malinvestment and

financial crises A financial crisis is any of a broad variety of situations in which some financial assets suddenly lose a large part of their nominal value. In the 19th and early 20th centuries, many financial crises were associated with banking panics, and man ...

. Adherents of the

Austrian economics The Austrian School is a heterodox school of economic thought that advocates strict adherence to methodological individualism, the concept that social phenomena result exclusively from the motivations and actions of individuals. Austrian school ...

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 central ba ...

ers, which they propose to eliminate by introducing

full-reserve banking Full-reserve banking (also known as 100% reserve banking, narrow banking, or sovereign money system) is a system of banking where banks do not lend demand deposits and instead, only lend from time deposits. It differs from fractional-reserve bank ...

. By contrast, post-Keynesian economists such as

Hyman Minsky Hyman Philip Minsky (September 23, 1919 – October 24, 1996) was an American economist, a professor of economics at Washington University in St. Louis, and a distinguished scholar at the Levy Economics Institute of Bard College. His research at ...

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 (economics), profit. Central characteristics of capitalism include capital accumulation, competitive markets, pric ...

, 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 handled ...

. Both schools have been the subject of renewed attention in the Western world since the

financial crisis of 2007–2010 Finance is the study and discipline of money, currency and capital assets. It is related to, but not synonymous with economics, the study of production, distribution, and consumption of money, assets, goods and services (the discipline of fina ...

Price discrimination

Firms use

price discrimination Price discrimination is a microeconomic pricing strategy where identical or largely similar goods or services are sold at different prices by the same provider in different markets. Price discrimination is distinguished from product different ...

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