Functions of pricesIn a free-Business, enterprise exchange (economics), exchange economy characterized by private ownership of the means of production, prices serve five functions: * they are a means of transmitting information about changes in relative importance of goods and factors of production * they provide an incentive to enterprises to produce those products that are valued most highly by the market (economics), market and to use methods of production that economize relatively scarce factors of production * they provide an incentive to owners of resources to direct them into the most highly remunerated uses * they distribute output among the owners of production * they ration fixed supplies of goods among consumers * they give a good outlook to the quality of a product * they help people budget easier and for how to save for future events/ needs and wants.
Price and valueThe paradox of value was observed and debated by Classical economics, 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 pricesNegative 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, because of global health/economic crisis situation, price of (futures contract for) West Texas Intermediate, 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 futures contract, contract, 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. Negative interest rates are a similar concept.
Austrian School theoryOne solution offered to the paradox of 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 Marginalism, 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 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 tautology (logic), 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 Michal 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 timeMarxists assert that Theory of value (economics), 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 Competitive equilibrium, Walrasian equilibrium theory into Marxism where there is no such thing as equilibrium.
Confusion between prices and costs of productionPrice 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. 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 pointThe 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 sterling, 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.
Market priceIn economics, market price is the economic price for which a Good (economics), good or Service (economics), 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, Economic equilibrium, equilibrium, and rational expectations. On restaurant menus, "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.
Other termsBasic price is the price a seller gets after removing any taxes paid by a buyer and adding any subsidy the seller gets for selling. Producer price is the amount the producer gets from a buyer for a unit of a good or service produced as output minus any tax, it excludes any transport charges invoiced separately by the producer. 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 Pricing, also
References* Milton Friedman, ''Price Theory''. * George Stigler, ''Theory of Price''. * Simon Clarke, ''Marx, marginalism, and modern sociology: from Adam Smith to Max Weber'' (London: The Macmillan Press, Ltd, 1982). * Makoto Itoh & 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* Fernando Vianello, Vianello, F. , “Natural (or Normal) Prices. Some Pointers”, in: ''Political Economy. Studies in the Surplus Approach'', 2, pp. 89–105.