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A price is the (usually not negative)
quantity
Quantity or amount is a property that can exist as a Counting, multitude or Magnitude (mathematics), magnitude, which illustrate discontinuity (mathematics), discontinuity and continuum (theory), continuity. Quantities can be compared in terms o ...
of
payment
A payment is the voluntary tender of money or its equivalent or of things of value by one party (such as a person or company) to another in exchange for goods, or services provided by them, or to fulfill a legal obligation. The party making the p ...
or
compensation given by one
party
A party is a gathering of people who have been invited by a host for the purposes of socializing, conversation, recreation, or as part of a festival or other commemoration or celebration of a special occasion. A party will often feature f ...
to another in return for
goods
In economics, goods are items that satisfy human wants
and provide utility, for example, to a consumer making a purchase of a satisfying product. A common distinction is made between goods which are transferable, and services, which are not tran ...
or
services
Service may refer to:
Activities
* Administrative service, a required part of the workload of university faculty
* Civil service, the body of employees of a government
* Community service, volunteer service for the benefit of a community or a pu ...
. In some situations, 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 A good's price is influenced by production
cost
In production, research, retail, and accounting, a cost is the value of money that has been used up to produce something or deliver a service, and hence is not available for use anymore. In business, the cost may be one of acquisition, in which ...
s,
supply
Supply may refer to:
*The amount of a resource that is available
**Supply (economics), the amount of a product which is available to customers
**Materiel, the goods and equipment for a military unit to fulfill its mission
*Supply, as in confidenc ...
of the desired item, and
demand
In economics, demand is the quantity of a good that consumers are willing and able to purchase at various prices during a given time. The relationship between price and quantity demand is also called the demand curve. Demand for a specific item ...
for the product. A price may be determined by a
monopolist
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 ...
or may be imposed on the firm by market conditions.
Price can be quoted to currency, quantities of goods or vouchers.
* In modern
economies
An economy is an area of the production, distribution and trade, as well as consumption of goods and services. In general, it is defined as a social domain that emphasize the practices, discourses, and material expressions associated with the p ...
, prices are generally expressed in units of some form of
currency
A currency, "in circulation", from la, currens, -entis, literally meaning "running" or "traversing" is a standardization of money in any form, in use or circulation as a medium of exchange, for example banknotes and coins.
A more general def ...
. (More specifically, for
raw materials
A raw material, also known as a feedstock, unprocessed material, or primary commodity, is a basic material that is used to produce goods, finished goods, energy, or intermediate materials that are feedstock for future finished products. As feedst ...
they are expressed as currency per unit weight, e.g. euros per kilogram or Rands per KG.)
* Although prices could be
quoted as quantities of other goods or services, this sort of
barter exchange
In trade, barter (derived from ''baretor'') is a system of exchange in which participants in a transaction directly exchange goods or services for other goods or services without using a medium of exchange, such as money. Economists distingu ...
is rarely seen. Prices are sometimes quoted in terms of vouchers such as trading stamps and air miles.
* In some circumstances, cigarettes have been used as currency, for example in prisons, in times of
hyperinflation
In economics, hyperinflation is a very high and typically accelerating inflation. It quickly erodes the real value of the local currency, as the prices of all goods increase. This causes people to minimize their holdings in that currency as t ...
, and in some places during World War II. In a
black market
A black market, underground economy, or shadow economy is a clandestine market or series of transactions that has some aspect of illegality or is characterized by noncompliance with an institutional set of rules. If the rule defines the se ...
economy,
barter
In trade, barter (derived from ''baretor'') is a system of exchange in which participants in a transaction directly exchange goods or services for other goods or services without using a medium of exchange, such as money. Economists distingu ...
is also relatively common.
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
In production, research, retail, and accounting, a cost is the value of money that has been used up to produce something or deliver a service, and hence is not available for use anymore. In business, the cost may be one of acquisition, in which ...
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
Ask price, also called offer price, offer, asking price, or simply ask, is the price a seller states they will accept.
The seller may qualify the stated asking price as firm or negotiable. Firm means the seller is implying that the price is fixed ...
or selling price, while the actual payment may be called transaction price or traded price. Likewise, the
bid price
A bid price is the highest price that a buyer (i.e., bidder) is willing to pay for some goods. It is usually referred to simply as the "bid". In bid and ask, the bid price stands in contrast to the ask price or "offer", and the difference betwee ...
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
A price is the (usually not negative) quantity of payment or Financial compensation, compensation given by one Party (law), party to another in return for Good (economics), goods or Service (economics), services. In some situations, the pr ...
reflects interaction between
supply and demand
In microeconomics, supply and demand is an economic model of price determination in a Market (economics), market. It postulates that, Ceteris paribus, holding all else equal, in a perfect competition, competitive market, the unit price for a ...
: 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
In economics, utility is the satisfaction or benefit derived by consuming a product. The marginal utility of a Goods (economics), good or Service (economics), service describes how much pleasure or satisfaction is gained by consumers as a result o ...
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
A raw material, also known as a feedstock, unprocessed material, or primary commodity, is a basic material that is used to produce goods, finished goods, energy, or intermediate materials that are feedstock for future finished products. As feedst ...
or a similar economic good for sale at multiple locations, the
law of one price
The law of one price (LOOP) states that in the absence of trade frictions (such as transport costs and tariffs), and under conditions of free competition and price flexibility (where no individual sellers or buyers have power to manipulate prices ...
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
Milton Friedman (; July 31, 1912 – November 16, 2006) was an American economist and statistician who received the 1976 Nobel Memorial Prize in Economic Sciences for his research on consumption analysis, monetary history and theory and the ...
, price has five functions in a free-enterprise exchange economy which is characterized by private ownership of the means of production:
* Transmitting information about changes in the relative importance of different end-products and factors of production.
* Providing an incentive to enterprise a) To produce those products valued most highly by the market; b) To use methods of production that economize relatively scarce factors of production;
* Providing an incentive to owners of resources to direct them into the most highly remunerated uses;
* Distributing output among the owners of resources;
* Rationing fixed supplies of goods among consumers.;
Price and value
The
paradox of value
The paradox of value (also known as the diamond–water paradox) is the contradiction that, although water is on the whole more useful, in terms of survival, than diamonds, diamonds command a higher price in the market. The philosopher Adam Smith ...
was observed and debated by
classical economists
Classical economics, classical political economy, or Smithian economics is a school of thought in political economy that flourished, primarily in Britain, in the late 18th and early-to-mid 19th century. Its main thinkers are held to be Adam Smit ...
.
Adam Smith
Adam Smith (baptized 1723 – 17 July 1790) was a Scottish economist and philosopher who was a pioneer in the thinking of political economy and key figure during the Scottish Enlightenment. Seen by some as "The Father of Economics"——— ...
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
Use value (german: Gebrauchswert) or value in use is a concept in classical political economy and Marxist economics. It refers to the tangible features of a commodity (a tradeable object) which can satisfy some human requirement, want or need, or ...
was supposed to give some measure of usefulness, later refined as
marginal benefit
In economics, utility is the satisfaction or benefit derived by consuming a product. The marginal utility of a good or service describes how much pleasure or satisfaction is gained by consumers as a result of the increase or decrease in consumpti ...
while
exchange value
In political economy and especially Marxian economics, exchange value (German: ''Tauschwert'') refers to one of the four major attributes of a commodity, i.e., an item or service produced for, and sold on the market, the other three attributes be ...
was the measure of how much one good was in terms of another, namely what is now called
relative price
A relative price is the price of a commodity such as a good or 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 goods or the ratio between the price o ...
.
Negative prices
Negative prices
In economics, negative pricing can occur when demand for a product drops or Supply (economics), supply increases to an extent that owners or suppliers are prepared to pay others to accept it, in effect setting the price to a negative number. This ...
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
In finance, a futures contract (sometimes called a futures) is a standardized legal contract to buy or sell something at a predetermined price for delivery at a specified time in the future, between parties not yet known to each other. The asset ...
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
A contract is a legally enforceable agreement between two or more parties that creates, defines, and governs mutual rights and obligations between them. A contract typically involves the transfer of goods, services, money, or a promise to tran ...
, there would be nowhere to put it as a glut of crude fills up available storage." 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
In economics, goods are items that satisfy human wants
and provide utility, for example, to a consumer making a purchase of a satisfying product. A common distinction is made between goods which are transferable, and services, which are not tran ...
.
Negative interest rates
An interest rate is the amount of interest due per period, as a proportion of the amount lent, deposited, or borrowed (called the principal sum). The total interest on an amount lent or borrowed depends on the principal sum, the interest rate, th ...
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
Carl Menger von Wolfensgrün (; ; 28 February 1840 – 26 February 1921) was an Austrian economist and the founder of the Austrian School of economics. Menger contributed to the development of the theories of marginalism and marginal utility ...
, one of the founders of the
Austrian School
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 ...
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".
Without denying the applicability of the Austrian theory of value as ''subjective'' only, within certain contexts of price behavior, the Polish economist
Oskar Lange
Oskar Ryszard Lange (27 July 1904 – 2 October 1965) was a Polish economist and diplomat. He is best known for advocating the use of market pricing tools in socialist systems and providing a model of market socialism. He responded to the economi ...
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
The Cambridge capital controversy, sometimes called "the capital controversy"Brems (1975) pp. 369-384 or "the two Cambridges debate", was a dispute between proponents of two differing theoretical and mathematical positions in economics that starte ...
initiated by
Piero Sraffa
Piero Sraffa (5 August 1898 – 3 September 1983) was an influential Italian economist who served as lecturer of economics at the University of Cambridge. His book ''Production of Commodities by Means of Commodities'' is taken as founding the neo- ...
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.
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
Michał Kalecki (; 22 June 1899 – 18 April 1970) was a Polish Marxian economist. Over the course of his life, Kalecki worked at the London School of Economics, University of Cambridge, University of Oxford and Warsaw School of Economics an ...
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.
Price as productive human labour time
Marxists assert that
value
Value or values may refer to:
Ethics and social
* Value (ethics) wherein said concept may be construed as treating actions themselves as abstract objects, associating value to them
** Values (Western philosophy) expands the notion of value beyo ...
derives from the volume of
socially necessary labour time
Socially necessary labour time in Marx's critique of political economy is what regulates the exchange value of commodities in trade and consequently constrains producers in their attempt to economise on labour. It does not 'guide' them, as it ca ...
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
In 20th-century discussions of Karl Marx's economics, the transformation problem is the problem of finding a general rule by which to transform the "values" of commodities (based on their socially necessary labour content, according to his labou ...
. 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
In economics and finance, the profit rate is the relative profitability of an investment project, a capitalist enterprise or a whole capitalist economy. It is similar to the concept of rate of return on investment.
Historical cost ''vs.'' market ...
. 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.
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
Marketing is the process of exploring, creating, and delivering value to meet the needs of a target market in terms of goods and services; potentially including selection of a target audience; selection of certain attributes or themes to emph ...
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
A nonprofit organization (NPO) or non-profit organisation, also known as a non-business entity, not-for-profit organization, or nonprofit institution, is a legal entity organized and operated for a collective, public or social benefit, in co ...
, such as charities, educational institutions and industry trade groups, also involve setting prices.
[
] 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.
[
]
Price point
The price of an item is also called the "price point
Price points are prices at which demand for a given product is supposed to stay relatively high.
Characteristics
Introductory microeconomics depicts a demand curve as downward-sloping to the right and either linear or gently convex to the origi ...
", especially if it refers to stores that set a limited number of price points. For example, Dollar General
Dollar General Corporation is an American chain of variety stores headquartered in Goodlettsville, Tennessee. As of April 11, 2022, Dollar General operates 18,216 stores in the continental United States.
The company began in 1939 as a family-own ...
is a general store or "five and dime
A variety store (also five and dime (historic), pound shop, or dollar store) is a retail store that sells general merchandise, such as apparel, automotive parts, dry goods, toys, hardware, home furnishings, and a selection of groceries. It us ...
" store that sets price points only at even amounts, such as exactly one, two, three, five, or ten dollar
Dollar is the name of more than 20 currencies. They include the Australian dollar, Brunei dollar, Canadian dollar, Hong Kong dollar, Jamaican dollar, Liberian dollar, Namibian dollar, New Taiwan dollar, New Zealand dollar, Singapore dollar, U ...
s (among others). Other stores have a policy of setting most of their prices ending in 99 cents or pence. Other stores (such as dollar store
A variety store (also five and dime (historic), pound shop, or dollar store) is a retail store that sells general merchandise, such as apparel, automotive parts, dry goods, toys, hardware, home furnishings, and a selection of groceries. It us ...
s, pound stores, euro
The euro ( symbol: €; code: EUR) is the official currency of 19 out of the member states of the European Union (EU). This group of states is known as the eurozone or, officially, the euro area, and includes about 340 million citizens . ...
stores, 100-yen
The is the official currency of Japan. It is the third-most traded currency in the foreign exchange market, after the United States dollar (US$) and the euro. It is also widely used as a third reserve currency after the US dollar and the e ...
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.
Market price
In economics
Economics () is the social science that studies the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods and services.
Economics focuses on the behaviour and intera ...
, the market price is the economic price for which a good
In most contexts, the concept of good denotes the conduct that should be preferred when posed with a choice between possible actions. Good is generally considered to be the opposite of evil and is of interest in the study of ethics, morality, ph ...
or service
Service may refer to:
Activities
* Administrative service, a required part of the workload of university faculty
* Civil service, the body of employees of a government
* Community service, volunteer service for the benefit of a community or a pu ...
is offered in the marketplace
A marketplace or market place is a location where people regularly gather for the purchase and sale of provisions, livestock, and other goods. In different parts of the world, a marketplace may be described as a '' souk'' (from the Arabic), ' ...
. It is of interest mainly in the study of microeconomics
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 fo ...
. Market value
Market value or OMV (Open Market Valuation) is the price at which an asset would trade in a competitive auction setting. Market value is often used interchangeably with ''open market value'', ''fair value'' or ''fair market value'', although the ...
and market price are equal only under conditions of market efficiency
The efficient-market hypothesis (EMH) is a hypothesis in financial economics that states that asset prices reflect all available information. A direct implication is that it is impossible to "beat the market" consistently on a risk-adjusted bas ...
, equilibrium, and rational expectations
In economics, "rational expectations" are model-consistent expectations, in that agents inside the model
A model is an informative representation of an object, person or system. The term originally denoted the plans of a building in late 16 ...
. 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.
On restaurant
A restaurant is a business that prepares and serves food and drinks to customers. Meals are generally served and eaten on the premises, but many restaurants also offer take-out and food delivery services. Restaurants vary greatly in appearan ...
menu
In a restaurant, the menu is a list of food and beverages offered to customers and the prices. A menu may be à la carte – which presents a list of options from which customers choose – or table d'hôte, in which case a pre-established seque ...
s, 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
Seafood is any form of sea life regarded as food by humans, prominently including fish and shellfish. Shellfish include various species of molluscs (e.g. bivalve molluscs such as clams, oysters and mussels, and cephalopods such as octopus an ...
, notably lobster
Lobsters are a family (biology), family (Nephropidae, Synonym (taxonomy), synonym Homaridae) of marine crustaceans. They have long bodies with muscular tails and live in crevices or burrows on the sea floor. Three of their five pairs of legs ...
s and oyster
Oyster is the common name for a number of different families of salt-water bivalve molluscs that live in marine or brackish habitats. In some species, the valves are highly calcified, and many are somewhat irregular in shape. Many, but not al ...
s.
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.
Producer Price Index: It measures the average change of the selling price of domestic producers' products over time.
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.
Price optimization
Price optimization is the use of mathematical analysis by a company to determine how customers will respond to different prices for its products and services through different channels. It is also used to determine the prices that the company deter ...
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
References
* Milton Friedman
Milton Friedman (; July 31, 1912 – November 16, 2006) was an American economist and statistician who received the 1976 Nobel Memorial Prize in Economic Sciences for his research on consumption analysis, monetary history and theory and the ...
, ''Price Theory''.
* George Stigler
George Joseph Stigler (; January 17, 1911 – December 1, 1991) was an American economist. He was the 1982 laureate in Nobel Memorial Prize in Economic Sciences and is considered a key leader of the Chicago school of economics.
Early life and ...
, ''Theory of Price''.
* Simon Clarke, ''Marx, marginalism, and modern sociology: from Adam Smith to Max Weber'' (London: The Macmillan Press, Ltd, 1982).
* Makoto Itoh
is a Japanese economist and is considered internationally to be one of the most important scholars of Karl Marx
Karl Heinrich Marx (; 5 May 1818 – 14 March 1883) was a German philosopher, economist, historian, sociologist, political th ...
& Costas Lapavitsas
Costas Lapavitsas ( el, Kώστας Λαπαβίτσας) is a professor of economics at the School of Oriental and African Studies, University of London and was elected as a member of the Hellenic Parliament for the left-wing Syriza party in the ...
, ''Political Economy of Money and Finance''.
* Pierre Vilar
Pierre Vilar (3 May 1906, Frontignan – 7 August 2003, Saint-Palais) was a French historian specialized in the history of Catalonia and Hispanism. He is considered one of the most authoritative 20th-century historians for the history of Spain, ...
, ''A history of gold and money''.
* William Barber, ''A History of Economic Thought.''
*Vaggi G. ''The New Palgrave Dictionary of Economics: Market Price''
Further reading
* Vianello, F. 989
Year 989 (Roman numerals, CMLXXXIX) was a common year starting on Tuesday (link will display the full calendar) of the Julian calendar.
Events
By place
Byzantine Empire
* Emperor Basil II uses his contingent of 6,000 Varangians to he ...
“Natural (or Normal) Prices. Some Pointers”, in: ''Political Economy. Studies in the Surplus Approach'', 2, pp. 89–105.
External links
*
Prices and Wages by Decade library guide
– Historical prices and wages research guide at the University of Missouri libraries
{{Authority control
Pricing