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

In all modern economies, the overwhelming majority of prices are quoted in (and the transactions involve) units of some form of currency In economics, the term currency can refer to a particular currency, for example Pound Sterling, or to the coins and banknotes of a particular currency, which comprise the physical aspects of a nation's money supply. The other part of a nation's money supply consists of money deposited in banks , ownership of which can be transferred by means of. Although in theory, prices could be quoted as quantities of other goods or services this sort of barter exchange is rarely seen.

Price can sometimes alternatively refer 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 or offer price, while the actual payment may be called the transaction price or traded price.

Economists view price as an exchange ratio between goods that are exchanged for each other. In the case of barter of two goods in the quantities x and y, the price of a unit of the first good is the ratio y/x, while the price of a unit of the second good is the ratio x/y.

This however has not been used consistently, so that old confusion regarding value frequently reappears. The value of something is a quantity counted in common units of value called numeraire, which may even be an imaginary good. This is done to compare different goods. The unit of value is frequently confused with price, because market value is calculated as the quantity of some good multiplied by its nominal price.

Theory of price asserts that the market price reflects interaction between two opposing considerations. On the one side are demand considerations based on marginal utility, while on the other side are supply considerations based on marginal cost. An equilibrium price is supposed to be at once equal to marginal utility (counted in units of income) from the buyer's side and marginal cost from the seller's side. Though this view is accepted by almost every economist, and it constitutes the core of mainstream economics, it has recently been challenged seriously.

There was time when people debated use-value versus exchange value, often wondering about the 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. Nicolaus Copernicus, John Locke, John Law and others had previously (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.

Relative and nominal price

The difference between nominal price and relative or real price (as exchange ratio) is often made. Nominal price is the price quoted in money while relative or real price is the exchange ratio between real goods regardless of money. The distinction is made to make sense of inflation. When all prices are quoted in terms of money units, and the prices in money units change more or less proportionately, the ratio of exchange may not change much. In the extreme case, if all prices quoted in money change in the same proportion, the relative price remains the same.

It is now becoming clear that the distinction is not useful and indeed hides a major confusion. The conventional wisdom is that proportional change in all nominal prices does not affect real price, and hence should not affect either demand or supply and therefore also should not affect output. The new criticism is that the crucial question is why is there more money to pay for the same old real output. If this question is answered, it will show that dynamically, even as the real price remains exactly the same, output in real terms can change, just because additional money allow additional output to be traded. The supply curve can shift such that at the old price, the new higher output is sold. This shift if not possible without additional money.

From this point of view, a price is similar to an opportunity cost Opportunity cost is the cost related to the next-best choice available to someone who has picked between several mutually exclusive choices. It is a key concept in economics. It has been described as expressing "the basic relationship between scarcity and choice." The notion of opportunity cost plays a crucial part in ensuring that, that is, what must be given up in exchange for the good or service that is being purchased. For example, if x=1 and y=2, the relative price of x in terms of y is 2, and the price of y in terms of x is 0.5.

The price of an item is also called the price point Price points are prices at which demand for a given product stays relatively high, especially where it refers to stores that set a limited number of price points. For example, Dollar General Dollar General, Corp is a chain of variety stores operating in 35 U.S. states. The chain operates 8,828 stores and its headquarters is located in Goodlettsville, Tennessee, a suburb of Nashville. The stores were founded in 1939 by Cal Turner in Scottsville, Kentucky as J.L. Turner & Son, Inc. In 1968 they changed the name to Dollar General is a general store The general store or general merchandise store is a store that carries a general line of merchandise or "five and dime A variety store or price-point retailer is a retail store that sells inexpensive items, usually with a single price point for all items in the store. Typical merchandise includes cleaning supplies, toys, and confectionery. Formerly many variety stores had lunch counters for inexpensive meals. "Variety store" may also refer to a" store that sets price points only at even amounts, such as exactly one, two, three, five, or ten dollars The dollar is the name of the official currency in several economies, including the United States, Australia, New Zealand, Canada, the Eastern Caribbean territories, Hong Kong, Taiwan, Singapore, Brunei, East Timor, Ecuador, Suriname, El Salvador, Panama, and Belize (among others). Other stores (such as dollar stores A variety store or price-point retailer is a retail store that sells inexpensive items, usually with a single price point for all items in the store. Typical merchandise includes cleaning supplies, toys, and confectionery. Formerly many variety stores had lunch counters for inexpensive meals. "Variety store" may also refer to a, pound The pound sterling , commonly called the pound, is the official currency of the United Kingdom, its Crown dependencies (the Isle of Man and the Channel Islands) 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 (singular: penny) stores, euro The euro is the official currency of the Eurozone: 16 of the 27 Member States of the European Union (EU) and is the currency used by the EU institutions. The eurozone consists of Austria, Belgium, Cyprus, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia and Spain. Estonia is due to stores, 100-yen The Japanese yen (sign: ¥; code: JPY) is the official currency of Japan. It is the third most-traded currency in the foreign exchange market after United States dollar and the euro. It is also widely used as a reserve currency after the U.S. dollar, the euro and the pound sterling. As is common when counting in East Asia, large quantities of 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.

Austrian theory

The last objection is also sometimes interpreted as the 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. Nicolaus Copernicus, John Locke, John Law and others had previously, which was observed by classical economists 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 was a Scottish moral philosopher and a pioneer of political economics. 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. The latter, usually abbreviated as The Wealth of Nations, is considered his magnum opus and 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 In economics, the marginal utility of a good or service is the utility gained from an increase (or decrease) in the consumption of that good or service. In general, preferences display diminishing marginal utility. That is, the first unit of consumption of a good or service yields more utility than the second and subsequent units. The concept of proposed by 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, the father of the Austrian School The Austrian School is a heterodox school of economic thought that emphasizes the spontaneous organizing power of the price mechanism. Its name derives from the identity of its founders and early supporters, who were citizens of the old Austrian Habsburg Empire, including Carl Menger, Eugen von Böhm-Bawerk, Ludwig von Mises, and Friedrich Hayek 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 was a Polish economist and diplomat. He was most known for advocating the use of market pricing tools in socialist systems and providing the earliest model of market socialism 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 simply called "the capital controversy" – refers to a theoretical and mathematical debate during the 1960s among economists concerning the nature and role of capital goods and the critique of the dominant neoclassical vision of aggregate production and distribution. The name arises initiated by 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 revealed that most of the foundational tenets of the marginalist theory of value either reduced to tautologies In logic, a tautology is a formula which is true in every possible interpretation. The 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 today, 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 Michał Kalecki was a Polish Marxist economist who specialized in macroeconomics of a broadly-defined Keynesian sort. Over the course of his life, Kalecki worked at the London School of Economics, University of Cambridge, University of Oxford and Warsaw School of Economics as well as an economic advisor to governments of Cuba, Israel, Mexico and 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" is a generic term which encompasses all the theories within economics that attempt to explain the exchange value or price of goods and services. Key questions in economic theory include why goods and services are priced as they are, how the value of goods and services comes about, and for normative value theories how to 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 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. This problem was first introduced by Marx himself in Chapter 9 of Capital's draft Volume III, where he also tried to. 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.^{[citation needed]}

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. Non-profit organizations, such as charities, educational institutions and industry trade groups, also set prices, though this is often not as apparent. 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. While a charitable organization may not call it a price in their promotional material, in reality these targets are prices since they specify a cost that must be paid by buyers (donors) in order to obtain something of value.

See also

• Cost In business, retail, and accounting, a cost is the value of money that has been used up to produce something, and hence is not available for use anymore. In economics, a cost is an alternative that is given up as a result of a decision. In business, the cost may be one of acquisition, in which case the amount of money expended to acquire it is
• Currency In economics, the term currency can refer to a particular currency, for example Pound Sterling, or to the coins and banknotes of a particular currency, which comprise the physical aspects of a nation's money supply. The other part of a nation's money supply consists of money deposited in banks , ownership of which can be transferred by means of
• Economic crisis The term financial crisis is applied broadly to a variety of situations in which some financial institutions or assets suddenly lose a large part of their value. In the 19th and early 20th centuries, many financial crises were associated with banking panics, and many recessions coincided with these panics. Other situations that are often called
• Free price system A free price system or free price mechanism is an economic system where prices are set by the interchange of supply and demand, with the resulting prices being understood as signals that are communicated between producers and consumers which serve to guide the production and distribution of resources. Through the free price system, supplies are
• Geo (marketing) As a general term, Geomarketing is the integration of Geographical intelligence into all marketing aspects including sales and distribution. Geomarketing Research is the use of geographic parameters in research methodology starting from sampling, data collection, analysis, and presentation. Geomarketing Services are more related to routing,
• Law of value The law of value is a central concept in Karl Marx's critique of political economy, first expounded in his polemic The Poverty of Philosophy against Pierre-Joseph Proudhon, with reference to David Ricardo's economics. Most generally, it refers to a regulative principle of the economic exchange of the products of human work: the relative exchange-
• Marketing Marketing is the process by which companies create customer interest in products or services. It generates the strategy that underlies sales techniques, business communication, and business development. It is an integrated process through which companies build strong customer relationships and create value for their customers and for themselves
• Marketing mix The term "marketing mix" was first used in 1953 when Neil Borden, in his American Marketing Association presidential address, took the recipe idea one step further and coined the term "marketing-mix". A prominent marketer, E. Jerome McCarthy, proposed a 4 P classification in 1960, which has seen wide use. The four Ps concept is
• Microeconomics Microeconomics is a branch of economics that studies how the individual parts of the economy, the household and the firms, make decisions to allocate limited resources, typically in markets where goods or services are being bought and sold. Microeconomics examines how these decisions and behaviours affect the supply and demand for goods and
• Production, costs, and pricing In microeconomics, industrial organization is the field which describes the behavior of firms in the marketplace with regard to production, pricing, employment and other decisions. Topics in this field range from classical issues such as opportunity cost to neoclassical concepts such as factors of production
• Price system In economics, a price system is any economic system that effects its distribution of goods and services with prices and employing any form of money or debt tokens. Except for possible remote and primitive communities, all modern societies use price systems to allocate resources. However, price systems are not used for all resource allocation
• Pricing Pricing is the process of determining what a company will receive in exchange for its products. Pricing factors are manufacturing cost, market place, competition, market condition, and quality of product. Pricing is also a key variable in microeconomic price allocation theory. Pricing is a fundamental aspect of financial modeling and is one of the in marketing
• Price fixing Price fixing is an 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 level by controlling supply and demand. The group of market makers involved in price fixing is sometimes referred to as
• Price point Price points are prices at which demand for a given product stays relatively high
• Price trend A market trend is a putative prevailing course or tendency of a financial market to move in a particular direction over time. These trends are classified as secular trends for long-term time frames, primary trends for mid-term periods, and secondary trends lasting short times. Traders identify market trends using technical analysis, a framework
• Real prices and ideal prices Real prices and ideal prices refers to a distinction between actual prices paid for products, services, assets and labour, and computed prices which are not actually charged or paid in market trade. Ideal prices, expressed in money-units, can be estimated, theorized or imputed for accounting or calculation purposes, and, even although they may not
• Resale price maintenance Resale price maintenance is the practice whereby a manufacturer and its distributors agree that the latter will sell the former's product at certain prices , at or above a price floor (minimum resale price maintenance) or at or below a price ceiling (maximum resale price maintenance). If a reseller refuses to maintain prices, either openly or
• Reservation price In microeconomics, the reservation price is the maximum price a buyer is willing to pay for a good or service; or, conversely, the minimum price at which a seller is willing to sell a good or service. Reservation prices are commonly used in auctions
• Suggested retail price The suggested retail price ((M)SRP), list price or recommended retail price (RRP) of a product is the price the manufacturer recommends that the retailer sell it for. The intention was to help to standardize prices among locations. While some stores always sell at, or below, the suggested retail price, others do so only when items are on sale or (also called 'recommended retail price')
• Time based pricing Time-based pricing is a special case of price discrimination in which producers charge different rates for a given good or service depending on the time, day, month, and so on. For instance, it is common practice in the tourism industry to charge higher prices during the peak season, or during special-event periods and only charge the operating
• Unit of account A unit of account is a standard monetary unit of measurement of the market value/cost of goods, services, or assets. It is one of three well-known functions of money. It lends meaning to profits, losses, liability, or assets
• Variable pricing Most firms use a Fixed price policy. That is, they examine the situation, determine an appropriate price, and leave the price fixed at that amount until the situation changes, at which point they go through the process again. The alternative has been variable pricing, a form of first degree price discrimination, characterized by individual
• value The economic value of a good or service has puzzled economists since the beginning of the discipline. First, economists tried to estimate the value of a good to an individual alone, and extend that definition to goods which can be exchanged. From this analysis came the concepts value in use and value in exchange
• Yield management Yield management, also known as revenue management, is the process of understanding, anticipating and influencing consumer behavior in order to maximize revenue or profits from a fixed, perishable resource

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.

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.

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