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A price is the (usually not negative) quantity of payment or compensation given by one party 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 ...
or services. 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 (economics), 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 o ...
s, supply 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 or may be imposed on the firm by market conditions. Price can be quoted to currency, quantities of goods or vouchers. * In modern economies, 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 ...
. (More specifically, for raw materials 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 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, and in some places during World War II. In a black market 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 dist ...
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 (economics), 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 o ...
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 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. It postulates that, holding all else equal, in a competitive market, the unit price for a particular good, or other traded item such as labo ...
: 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 good or service describes how much pleasure or satisfaction is gained by consumers as a result of the increase or decrease in consumpti ...
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 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 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.


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 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 ...
, 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 ...
. 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 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 scho ...
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 econ ...
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 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 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 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 can ...
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.


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 empha ...
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. 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", 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
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 ...
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 stores,
pound Pound or Pounds may refer to: Units * Pound (currency), a unit of currency * Pound sterling, the official currency of the United Kingdom * Pound (mass), a unit of mass * Pound (force), a unit of force * Rail pound, in rail profile Symbols * Po ...
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 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, distribution, and consumption of goods and services. Economics focuses on the behaviour and interactions of economic agents and how economies work. Microeconomics analy ...
, 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, p ...
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.
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, 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. 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 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 a ...
, notably
lobster Lobsters are a family (Nephropidae, 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 have claws, including the first pair, ...
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 a ...
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 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's theory of value. He teaches at Kokugakuin University, Tokyo, and is professor emeritus of the University of Tokyo. He belongs to ...
& Costas Lapavitsas, ''Political Economy of Money and Finance''. * Pierre Vilar, ''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