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- For people whose family name is Price see Price (other meanings).
In economics and business, the price is the assigned numerical monetary value of a good, service or asset.
The concept of price is central to microeconomics where it is one of the most important variables in resource allocation theory (also called price theory).
Price is also central to marketing where it is one of the four variables in the marketing mix that business people use to develop a marketing plan.
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Conventional definition
Historically, price value has superseded the barter value of pre-monetary systems, in which bartering was used to determine a value of a good or service. However, in countertrade prices may nevertheless be used to establish trading ratios, and informal bartering continues.
Economists, strictly speaking, view price as an exchange ratio between goods which reflects a utility preference by the buyer. Prices can also said to exist in a barter system, although they may not be expressed in money.
From this point of view, a price is similar to an opportunity cost, that is, what must be given up in exchange for the good or service that is being purchased.
The price of an item is also called the price point, especially where it refers to stores that set a limited number of price points. For example, Dollar General is a general store or "five and dime" store that sets price points only at even amounts, such as exactly one, two, three, five, or ten dollars (among others). Other stores (such as dollar stores, pound stores, euro stores, 100-yen stores, and so forth) only have a single price point (1$, 1£, 1€, 100¥), though in some cases this may get more than one of some very small items.
Marxian price theory
In Marxian economics, it is argued that price theory must be firmly grounded in the real history of economic exchange in human societies. Money-prices are viewed as the monetary expression of exchange-value. Exchange-value can however also be expressed in trading ratios between quantities of different types of goods.
In Marxian economics, the increasing use of prices as a convenient way to measure the economic or trading value of labor-products is explained historically and anthropologically, in terms of the development of the use of money as universal equivalent in economic exchange. However, in an anthropological-historical sense, Marxian economists argue a "price" is not necessarily a sum of money; it could be whatever the owner of a good gets in return, when exchanging that good. Money prices are merely the most common form of prices.
Marxian economists distinguish very strictly between real prices and ideal prices. Real prices are actual market prices realised in trade. Ideal prices are hypothetical prices which would be realised if certain conditions would apply. Most equilibrium prices are hypothetical prices, which are never realised in reality, and therefore of limited use, although notional prices can influence real economic behaviour.
According to Marxian economists, while all labor-products existing in an economy have economic value, only a minority of them have real prices; the majority of goods and assets at any time are not being traded, and they have at best a hypothetical price. Six criticisms Marxian economists make of neoclassical economics are that neoclassical price theory:
- is not based on any substantive, realistic theory of economic exchange as a social process, and simply assumes that exchange will occur;
- simply assumes prices can be attached or imputed to all goods and services;
- assumes equilibrium prices will exist and that markets tend spontaneously to equilibrium prices;
- fails to distinguish adequately between actual market prices; administered prices; and ideal, accounting, or hypothetical prices.
- disconnects price theory from the real economic history of the use of prices.
- is unable to provide a coherent explanation of the relationship between price and economic value.
Austrian theory
The last objection is also sometimes interpreted as the Paradox of Value, which was observed by classical economists. Adam Smith described what is now called the *Diamond-Water Paradox*. Namely, 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 proposed by Carl Menger, the father of the Austrian school 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 behaviour, the Polish economist Oskar Lange 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 behaviour 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 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 counterfactual 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 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.
References
- Milton Friedman, Price Theory.
- George J. 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.
See also
- Suggested retail price (also called 'recommended retail price')
- pricing in marketing
- price point
- unit of account
- value
- law of value
- currency
- marketing
- microeconomics
- marketing mix
- production, costs, and pricing
- price discovery function