Price
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A price is the (usually not negative)
Price can be quoted in currency, quantities of goods or vouchers.
- In modern economies, prices are generally expressed in units of some form of currency. (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 barter exchangeis 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 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 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. In business this requested amount is often referred to as the offer price or selling price, while the actual payment may be called transaction price or traded price.
Economic price theory asserts that in a free market economy the
When a raw material or a similar economic good is 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, price has five functions in a free-enterprise exchange economy which is characterized by private ownership of the means of production:[3]
- Transmitting information about changes in the relative importance of different end-products and factors of production.
- Providing an incentive for enterprise (a) to produce those products valued most highly by the market, and (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
Negative prices
In April 2020, for the first time in history, due to the global health/economic crisis situation, the price of (futures contract 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, there would be nowhere to put it as a glut of crude fills up available storage."[4] 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.
Austrian School theory
One solution offered to the paradox of the value is through the theory of marginal utility proposed by
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".[5]
Without denying the applicability of the Austrian theory of value as subjective only, within certain contexts of price behavior, the Polish economist
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.[citation needed]
Price as productive human labour time
Marxists assert that
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 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
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,
Market price
In
Under the UK's Sale of Goods Act 1979, damages for non-delivery of contracted goods take account of the market price for the goods where there is an available market.[9]
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, notably lobsters and oysters.[10]
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 are involved separately.[11]
Producer Price Index: It measures the average change in the selling price of domestic producers' products over time.[12]
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 a specific location in the required time.[13]
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
- Asset pricing
- Common law of business balance
- Factor price
- Free price system
- Geo (marketing)
- Law of value
- Marketing mix
- Microeconomics
- Observatory of prices
- Pink tax
- Price fixing
- Price system
- Price Trends
- Pricing in marketing
- Real prices and ideal prices
- Resale price maintenance
- Reservation price
- Share price
- Suggested retail price
- Time based pricing
- Unit of account
- Variable pricing
- Wholesale
- Yield management
Notes
- ISBN 978-1-4129-6474-6.
- ^ Banton, Caroline. "Theory of Price Definition". Investopedia. Retrieved 2021-04-25.
- ^ Milton Friedman, “Lerner on the Economics of Control”, in Milton Friedman (Ed.), Essays in Positive Economics. Chicago: University of Chicago Press, 1953, pp. 304.
- ^ Watts, William. "Why oil prices just crashed into negative territory — 4 things investors need to know". MarketWatch. Retrieved 2020-05-14.
- ISBN 9780819569387.
fears that cleavages in the economic structure might be unbridgeable could be suppressed
- ^ a b
Heyne, Paul; Boettke, Peter J.; Prychitko, David L. (2014). The Economic Way of Thinking (13th ed.). Pearson. ISBN 978-0-13-299129-2.
- ^ "What's a price point?". brainbi.
- ISBN 978-1-349-95121-5, retrieved 2021-11-20
- ^ UK Legislation, Sale of Goods Act 1979, section 51(3), accessed 11 January 2023
- S2CID 159086732, retrieved 2023-07-31
- ^ Statistics, c=AU; o=Commonwealth of Australia; ou=Australian Bureau of (2015-06-25). "Glossary - Glossary". www.abs.gov.au. Retrieved 2021-04-25.
{{cite web}}
: CS1 maint: multiple names: authors list (link) - ^ "Producer Price Index (PPI)". www.bls.gov. Retrieved 2021-04-25.
- ^ Statistics, c=AU; o=Commonwealth of Australia; ou=Australian Bureau of (2015-06-25). "Glossary - Glossary". www.abs.gov.au. Retrieved 2021-04-25.
{{cite web}}
: CS1 maint: multiple names: authors list (link)
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
- Vianello, F. [1989], “Natural (or Normal) Prices. Some Pointers”, in: Political Economy. Studies in the Surplus Approach, 2, pp. 89–105.
External links
- Encyclopædia Britannica. Vol. 22 (11th ed.). 1911. .
- Prices and Wages by Decade library guide – Historical prices and wages research guide at the University of Missouri libraries