Definition

In ordinary usage, price is the quantity of payment or compensation given by one party to another in return for goods or services.

In modern economies, prices are generally expressed in units of some form of currency

Currency

In economics, currency refers to a generally accepted medium of exchange. These are usually the coins and banknotes of a particular government, which comprise the physical aspects of a nation's money supply...

. (For commodities, they are expressed as currency per unit weight of the commodity, eg euros per kilogram.) 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 2. In the black 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 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

Ask price

Ask price, also called offer price, offer, asking price, or simply ask, is the price a seller states she or he will accept for a good....

 or selling price, while the actual payment may be called the transaction price or traded price. Likewise, the bid price

Bid price

A bid price is the highest price that a buyer is willing to pay for a good. 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 two is called the bid/ask spread.An unsolicited bid or purchase...

 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 Definition

Economists sometimes define price more generally as the ratio of the quantities of goods that are exchanged for each other. For example, suppose two people exchange 5 apples for 2 loaves of bread. Then the price of apples could be expressed as 2/5 = 0.4 loaves of bread. Likewise, the price of bread would be 5/2 = 2.5 apples.

However in reality prices are usually quoted and paid in currency. Thus it can be argued that the most basic and general definition of price is that expressed in money, and that the exchange ratio between two goods is simply derived from the two individual prices.

Price Theory

Economic theory asserts that in a free market economy the market price reflects interaction between 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 utility of the asset to different buyers and to different sellers. In reality, the price may be distorted by other factors, such as tax and other government regulations.

When a commodity

Commodity

In economics, a commodity is the generic term for any marketable item produced to satisfy wants or needs. Economic commodities comprise goods and services....

 is for sale at multiple locations, the Law of one price

Law of one price

The law of one price is an economic law stated as: "In an efficient market, all identical goods must have only one price."-Intuition:The intuition for this law is that all sellers will flock to the highest prevailing price, and all buyers to the lowest current market price. In an efficient market...

 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 etc. In the case of the majority of consumer goods and services, the distribution costs are quite a high proportion of the overall price, so the law may not be very useful. In practice it may well make economic sense to offer a product or service for sale at a higher price in a wealthy area than in a deprived area as the marginal utility of the asset for purchasers will be higher in the former.

Price and Value

There was time when people debated use-value versus exchange value, often wondering about the paradox of value

Paradox of value

The paradox of value is the apparent contradiction that, although water is on the whole more useful, in terms of survival, than diamonds, diamonds command a higher price in the market. The philosopher Adam Smith is often considered to be the classic presenter of this paradox...

 (diamond-water paradox). The use-value was supposed to give some measure of usefulness, later refined as marginal benefit (which is marginal utility counted in common units of value) while exchange value was the measure of how much one good was in terms of another, namely what is now called relative price.

Austrian theory

The last objection is also sometimes interpreted as the paradox of value

Paradox of value

The paradox of value is the apparent contradiction that, although water is on the whole more useful, in terms of survival, than diamonds, diamonds command a higher price in the market. The philosopher Adam Smith is often considered to be the classic presenter of this paradox...

, which was observed by classical economists

Classical economics

Classical economics is widely regarded as the first modern school of economic thought. Its major developers include Adam Smith, Jean-Baptiste Say, David Ricardo, Thomas Malthus and John Stuart Mill....

. Adam Smith

Adam Smith

Adam Smith was a Scottish social philosopher and a pioneer of political economy. One of the key figures of the Scottish Enlightenment, Smith is the author of The Theory of Moral Sentiments and An Inquiry into the Nature and Causes of the Wealth of Nations...

 described what is now called the Diamond – Water Paradox: diamonds command a higher price than water, yet water is essential for life, while diamonds are merely ornamentation. One solution offered to this paradox is through the theory of marginal utility

Marginal utility

In economics, the marginal utility of a good or service is the utility gained from an increase in the consumption of that good or service...

 proposed by Carl Menger

Carl Menger

Carl Menger was the founder of the Austrian School of economics, famous for contributing to the development of the theory of marginal utility, which contested the cost-of-production theories of value, developed by the classical economists such as Adam Smith and David Ricardo.- Biography :Menger...

, the father of the Austrian School

Austrian School

The Austrian School of economics is a heterodox school of economic thought. It advocates methodological individualism in interpreting economic developments , the theory that money is non-neutral, the theory that the capital structure of economies consists of heterogeneous goods that have...

 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 Lange

Oskar Ryszard Lange was a Polish economist and diplomat...

 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

Piero Sraffa was an influential Italian economist whose book Production of Commodities by Means of Commodities is taken as founding the Neo-Ricardian school of Economics.- Early life :...

 revealed that most of the foundational tenets of the marginalist theory of value either reduced to tautologies

Tautology (logic)

In logic, a tautology is a formula which is true in every possible interpretation. Philosopher Ludwig Wittgenstein first applied the term to redundancies of propositional logic in 1921; it had been used earlier to refer to rhetorical tautologies, and continues to be used in that alternate sense...

, 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 Kalecki

Michał Kalecki was a Polish economist who specialized in macroeconomics of a broadly-defined Keynesian sort...

 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

Theory of value (economics)

"Theory of value" is a generic term which encompasses all the theories within economics that attempt to explain the exchange value or price of goods and services...

 derives from the volume of socially necessary abstract 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

Transformation problem

In 20th century discussions of Karl Marx's economics the transformation problem is the problem of finding a general rule to transform the "values" of commodities into the "competitive prices" of the marketplace...

. 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 equal 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”. Technically, though, these are different concepts. Price is what a buyer pays to acquire products from a seller. Cost of production concerns the seller’s investment (e.g., manufacturing expense) in 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 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, can be described as 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. These targets can be seen as prices if they are interpreted as specifying a cost that must be paid by buyers (donors) in order to obtain something of value.

Price Point

The price of an item is also called the price point

Price point

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 either linear or gently convex to the origin...

, especially where it refers to stores that set a limited number of price points. For example, Dollar General

Dollar General

Dollar General Corp. is a U.S. chain of variety stores headquartered in Goodlettsville, Tennessee. As of January 2011, Dollar General operated over 9,300 stores in 35 U.S. states....

 is a general store

General store

A general store, general merchandise store, 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 space, where people from the town and surrounding rural areas come to purchase all their general...

 or "five and dime

Five and Dime

Five and Dime is a cartoon short by Walter Lantz which features Oswald the Lucky Rabbit. It is the 74th Oswald short produced by Lantz and the 125th overall. It also is among the number of shorts that feature Oswald in his fully clothed appearance....

" store that sets price points only at even amounts, such as exactly one, two, three, five, or ten dollar

Dollar

The dollar is the name of the official currency of many countries, including Australia, Belize, Canada, Ecuador, El Salvador, Hong Kong, New Zealand, Singapore, Taiwan, and the United States.-Etymology:...

s (among others). Other stores will have a policy of setting most of their prices ending in 99 cents or pence. Other stores (such as dollar store

Dollar store

A variety store or price-point retailer is a retail store that sells inexpensive items, often with a single price for all items in the store...

s, pound

Pound sterling

The pound sterling , commonly called the pound, is the official currency of the United Kingdom, its Crown Dependencies and the British Overseas Territories of South Georgia and the South Sandwich Islands, British Antarctic Territory and Tristan da Cunha. It is subdivided into 100 pence...

 stores, euro

Euro

The euro is the official currency of the eurozone: 17 of the 27 member states of the European Union. It is also the currency used by the Institutions of the European Union. The eurozone consists of Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg,...

 stores, 100-yen stores, and so forth) only have a single price point ($1, £1, 1€, ¥100), though in some cases this price may purchase more than one of some very small items. Price is relatively less than the cost price.

External links

• Cost of Living - Contains prices of goods and services worldwide
• Wages, Prices & Living Standards: The World-Historical Perspective
• Historicalstatistics.org Links to historical statistics on prices
• Price converter and calculator - Converting price between different currencies and calculating price in various measurements.