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A price is the (usually not negative)
quantity Quantity is a property that can exist as a multitude or magnitude, which illustrate discontinuity and continuity. Quantities can be compared in terms of "more", "less", or "equal", or by assigning a numerical value in terms of a unit of measureme ...
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 a paym ...
or
compensation Compensation may refer to: *Financial compensation *Compensation (chess), various advantages a player has in exchange for a disadvantage *Compensation (engineering) *''Compensation'' (essay), by Ralph Waldo Emerson *''Compensation'' (film), a 2000 ...
given by one
party 300px, ''Hip, Hip, Hurrah!'' (1888) by Peder_Severin_Krøyer">Hip,_Hip,_Hurrah!''_(1888)_by_Peder_Severin_Krøyer,_a_painting_portraying_an_artists'_party_in_19th_century_Denmark A_party_is_a_gathering_of_people_who_have_been_invited_by_a_Hos ...
to another in return for one unit of
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 trans ...
or
services Service may refer to: Activities :''(See the Religion section for religious activities)'' * Administrative service, a required part of the workload of university faculty * Civil service, the body of employees of a government * Community service, v ...
. A 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 cas ...
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 confidence ...
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 period of time. The relationship between price and quantity demanded is also called the demand curve. Demand for a spec ...
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) exists when a specific person or enterprise is the only supplier of a particular commodity. This contrasts with a monopsony wh ...
or may be imposed on the firm by market conditions. In modern
economies An economy (from Greek οίκος – "household" and νέμoμαι – "manage") is an area of the production, distribution and trade, as well as consumption of goods and services by different agents. In general, it is defined 'as a social do ...
, prices are generally expressed in units of some form of
currency A currency, "in circulation", from la, currens, -entis, literally meaning "running" or "traversing" in the most specific sense is money in any form when in use or circulation as a medium of exchange, especially circulating banknotes and coins. ...
. (For
commodities In economics, a commodity is an economic good, usually a resource, that has full or substantial fungibility: that is, the market treats instances of the good as equivalent or nearly so with no regard to who produced them. The price of a commodit ...
, they are expressed as currency per unit weight of the commodity, 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 distinguish ...
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 400px, Hyperinflation in Venezuela represented by the time it would take for money to lose 90% of its value (301-day rolling average, inverted logarithmic scale). In economics, hyperinflation is very high and typically accelerating inflatio ...
, and in some places during World War II. In a
black market Barcelona 2015 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 some form of noncompliant behavior with an institutional set o ...
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 distinguish ...
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 cas ...
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 A question is an utterance which typically functions as a request for information, which is expected to be provided in the form of an answer. Questions can thus be understood as a kind of illocutionary act in the field of pragmatics or as specia ...
or selling price, while the actual payment may be called the 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 a 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 between the ...
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 compensation given by one party to another in return for one unit of goods or services. A price is influenced by production costs, supply of the desired item, and demand for 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 labor or liq ...

supply and demand
: 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 utilityIn economics, utility is the satisfaction or benefit derived by consuming a product; thus the marginal utility of a good or service is the change in the utility from an increase in the consumption of that good or service. In the context of cardinal ...
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
commodity In economics, a commodity is an economic good, usually a resource, that has full or substantial fungibility: that is, the market treats instances of the good as equivalent or nearly so with no regard to who produced them. The price of a commodit ...
is 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

In a free- enterprise
exchange Exchange may refer to: Places United States * Exchange, Indiana, an unincorporated community * Exchange, Missouri, an unincorporated community * Exchange, Pennsylvania, an unincorporated community * Exchange, West Virginia, an unincorporated comm ...
economy characterized by private ownership of the means of production, prices serve five functions: * they are a means of transmitting
information Information can be thought of as the resolution of uncertainty; it answers the question of "What an entity is" and thus defines both its essence and the nature of its characteristics. The concept of ''information'' has different meanings in d ...

information
about changes in relative importance of
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 trans ...
and
factors of production In economics, factors of production, resources, or inputs are what is used in the production process to produce output—that is, finished goods and services. The utilized amounts of the various inputs determine the quantity of output according to ...
* they provide an incentive to enterprises to produce those products that are valued most highly by the
market Market may refer to: *Market (economics) *Market economy *Marketplace, a physical marketplace or public market Geography *Märket, an island shared by Finland and Sweden Art, entertainment, and media Films *''Market'' (1965 film), 1965 South K ...
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 value

The paradox of value was observed and debated by
classical economists#REDIRECT Classical economics {{Redirect category shell, 1= {{R from other capitalisation ...
.
Adam Smith Adam Smith ( 1723 – 17 July 1790) was a Scottish economist, philosopher as well as a moral philosopher, a pioneer of political economy, and a key figure during the Scottish Enlightenment, also known 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 Marxian economics. It refers to the tangible features of a commodity (a tradeable object) which can satisfy some human requirement, want or need, or w ...
was supposed to give some measure of usefulness, later refined as
marginal benefitIn economics, utility is the satisfaction or benefit derived by consuming a product; thus the marginal utility of a good or service is the change in the utility from an increase in the consumption of that good or service. In the context of cardinal ...
while
exchange value In political economy and especially Marxian economics, exchange value (German: ''Tauschwert'') refers to one of four major attributes of a commodity, i.e., an item or service produced for, and sold on the market. The other three aspects are use valu ...
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 of o ...
.


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, because of global health/economic crisis situation, price of (
futures contract In finance, a futures contract (sometimes called futures) is a standardized legal agreement to buy or sell something at a predetermined price at a specified time in the future, between parties not known to each other. The asset transacted is usuall ...
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 binding document between at least two parties that defines and governs the rights and duties of the parties to an agreement. A contract is legally enforceable because it meets the requirements and approval of the law. A ...
, 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 trans ...
.
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, the ...
are a similar concept.


Austrian School theory

One solution offered to the paradox of value is through the theory of marginal utility proposed by
Carl Menger Carl Menger (; ; 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 theory of marginalism (marginal utility), which rejected the cos ...
, one of the founders of the
Austrian School The Austrian School is a heterodox school of economic thought that is based on methodological individualism—the concept that social phenomena result exclusively from the motivations and actions of individuals.Ludwig von Mises. Human Action, ...
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 economic ...
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 started ...
initiated by
Piero Sraffa Piero Sraffa (Turin, Italy, 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 foun ...
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
Michal Kalecki Michal (; he, מיכל , gr, Μιχάλ) was, according to the first Book of Samuel, a princess of the United Kingdom of Israel; the younger daughter of King Saul, she was the first wife of David (), who later became king, first of Judah, the ...
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 o ...
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 labour ...
. 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 v ...
. 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 refers to activities a company undertakes to promote the buying or selling of a product, service, or good. It is one of the primary components of business management and commerce. Marketers can direct their product to other businesse ...
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), 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 contrast with an entity that oper ...
, 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 A, B, and C, along a framed 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 eith ...
", 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 January 2020, Dollar General operates 16,278 stores in the continental United States. The company began in 1939 as a family-owned ...
is a
general store A general merchant store (also known as general merchandise store, general dealer or village shop) is a rural or small-town store that carries a general line of merchandise. It carries a broad selection of merchandise, sometimes in a small spac ...
or "
five and dime 5 is a number, numeral, and glyph. 5, five or number 5 may also refer to: * AD 5, the fifth year of the AD era * 5 BC, the fifth year before the AD era Literature * ''5'' (visual novel), a 2008 visual novel by Ram * ''5'' (comics), an award-wi ...
" store that sets price points only at even amounts, such as exactly one, two, three, five, or ten
dollar Dollar (symbol: $) is the name of more than 20 currencies. They include Australian dollar, Canadian dollar, Hong Kong dollar, New Zealand dollar, Singapore dollar, New Taiwan dollar, Jamaican dollar, Liberian dollar, Namibian dollar, Brunei dolla ...
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, hardware, home furnishings, and a selection of groceries. It usually ...
s, pound stores,
euro The euro (symbol: €; code: EUR) is the official currency of 19 of the member states of the European Union. This group of states is known as the eurozone or euro area and includes about 343 million citizens . The euro, which is divided ...
stores, 100-
yen#REDIRECT Japanese yen {{R from other capitalisation ...
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 how people interact with value; in particular, the production, distribution, and consumption of goods and services. Economics focuses on the behaviour and interactions of economic agents and ...
, market price is the economic price for which a
good 175px, In many religions, angels are considered to be good beings. 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 ...
or
service Service may refer to: Activities :''(See the Religion section for religious activities)'' * Administrative service, a required part of the workload of university faculty * Civil service, the body of employees of a government * Community service, v ...
is offered in the
marketplace The Old Market building in Bratislava, Slovakia ">Slovakia.html" style="text-decoration: none;"class="mw-redirect" title="Bratislava, Slovakia">Bratislava, Slovakia A market, or marketplace, is a location where people regularly go t ...
. It is of interest mainly in the study of
microeconomics Microeconomics (from Greek prefix ''mikro-'' meaning "small" + ''economics'') is a branch of economics that studies the behavior of individuals and firms in making decisions regarding the allocation of scarce resources and the interactions amo ...
.
Market value Market may refer to: *Market (economics) *Market economy *Marketplace, a physical marketplace or public market Geography *Märket, an island shared by Finland and Sweden Art, entertainment, and media Films *''Market'' (1965 film), 1965 South K ...
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 basis ...
,
equilibrium List of types of equilibrium, the condition of a system in which all competing influences are balanced, in a wide variety of contexts. Equilibrium may also refer to: Film and television * ''Equilibrium'' (film), a 2002 science fiction film * ''T ...
, and
rational expectations In economics, "rational expectations" are model-consistent expectations, in that agents inside the model are assumed to "know the model" and on average take the model's predictions as valid. Rational expectations ensure internal consistency in mo ...
. On
restaurant A restaurant (), or an eatery, 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 grea ...
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 sequen ...

menu
s, "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 and sq ...
, notably
lobster Lobsters are a family (Nephropidae, sometimes also ''Homeridae'') of large marine crustaceans. Lobsters 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, incl ...

lobster
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 all oy ...

oyster
s.


Other terms

Basic 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

also Also or ALSO may refer to: *Advanced Life Support in Obstetrics (ALSO), a program developed by the American Academy of Family Physicians (AAFP) *Alsó-Fehér County, a historic administrative county (comitatus) of the Kingdom of Hungary *ALSO Group ...


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 compl ...
, ''Price Theory''. *
George Stigler George Joseph Stigler (; January 17, 1911 – December 1, 1991) was an American economist, the 1982 laureate in Nobel Memorial Prize in Economic Sciences and a key leader of the Chicago School of Economics. Early life and education Stigler was b ...
, ''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 Marx's theory of value. He teaches at Kokugakuin University, Tokyo, and is professor emeritus of the University of Tokyo. He belongs to the schoo ...
&
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 Jan ...
, ''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 (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 help him defeat Bardas ...
“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