A price signal is

information Information is an Abstraction, abstract concept that refers to something which has the power Communication, to inform. At the most fundamental level, it pertains to the Interpretation (philosophy), interpretation (perhaps Interpretation (log ...

conveyed to

consumer A consumer is a person or a group who intends to order, or use 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 producers, via the

price A price is the (usually not negative) quantity of payment or compensation expected, required, or given by one party to another in return for goods or services. In some situations, especially when the product is a service rather than a ph ...

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 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 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 of ...

signal to producers and consumers what production or consumption decisions will contribute to

allocative efficiency Allocative efficiency is a state of the economy in which production is aligned with the preferences of consumers and producers; in particular, the set of outputs is chosen so as to maximize the Economic surplus, social welfare of society. This is a ...

. According to

Friedrich Hayek Friedrich August von Hayek (8 May 1899 – 23 March 1992) was an Austrian-born British academic and philosopher. He is known for his contributions to political economy, political philosophy and intellectual history. Hayek shared the 1974 Nobe ...

, 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 of producers and consumers. A

monopoly A monopoly (from Greek language, Greek and ) is a market in which one person or company is the only supplier of a particular good or service. A monopoly is characterized by a lack of economic Competition (economics), competition to produce ...

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 st ...

, while a

cartel A cartel is a group of independent market participants who collaborate with each other as well as agreeing not to compete with each other in order to improve their profits and dominate the market. A cartel is an organization formed by producers ...

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 Microeconomics, microeconomic theory of monopsony assume ...

may negotiate or demand prices that do not reflect the cost of production. The pricing power 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 in a brief amount of time. It can also refer to short sales in which the speculator hope ...

, 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 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 Bank run#Systemic banki ...

. Adherents of the

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

attribute this phenomenon to the interference of

central bank A central bank, reserve bank, national bank, or monetary authority is an institution that manages the monetary policy of a country or monetary union. In contrast to a commercial bank, a central bank possesses a monopoly on increasing the mo ...

ers, which they propose to eliminate by introducing

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

. By contrast, post-Keynesian economists such as

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

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 use for the purpose of obtaining profit. This socioeconomic system has developed historically through several stages and is defined by ...

, corrected by

financial regulation Financial regulation is a broad set of policies that apply to the financial sector in most jurisdictions, justified by two main features of finance: systemic risk, which implies that the failure of financial firms involves public interest consi ...

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

2008 financial crisis The 2008 financial crisis, also known as the global financial crisis (GFC), was a major worldwide financial crisis centered in the United States. The causes of the 2008 crisis included excessive speculation on housing values by both homeowners ...

Price discrimination

Firms use

price discrimination Price discrimination (differential pricing, equity pricing, preferential pricing, dual pricing, tiered pricing, and surveillance pricing) is a Microeconomics, microeconomic Pricing strategies, pricing strategy where identical or largely similar g ...

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 an Israeli-Canadian economist who 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 20 ...

and

Shimshon Bichler Shimshon Bichler () is an Israeli 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 analys ...

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

References

{{Population Pricing Information

Pricing power

Value

Speculation

Price discrimination

See also

Further reading

References