Signal to increase or decrease quantity supplied or quantity demanded
A
price signal
is
information
conveyed to
consumers
and
producers
, via the
prices
offered or requested for, and the
amount
requested or offered of a
product or service
, which provides a signal to increase or decrease quantity supplied or quantity demanded. It also provides potential
business opportunities
. When a certain kind of product is in shortage supply and the price rises, people will pay more attention to and produce this kind of product. The information carried by prices is an essential function in the fundamental coordination of an economic system, coordinating things such as what has to be produced, how to produce it and what resources to use in its production.
[1]
In
mainstream (neoclassical) economics
, under
perfect competition
relative prices
signal to producers and consumers what
production
or
consumption
decisions will contribute to
allocative efficiency
. According to
Friedrich Hayek
, in a system in which the knowledge of the relevant facts is dispersed among many people, prices can act to coordinate the separate actions of different people in the same way as subjective values help the individual to coordinate the parts of his plan.
[2]
Pricing power
[
edit
]
Alternative theories include that prices reflect relative
pricing power
of producers and consumers. A
monopoly
may set prices so as to maximize
monopoly profit
, while a
cartel
may engage in
price fixing
. Conversely, on the consumer side, a
monopsony
may negotiate or demand prices that do not reflect the cost of production. The
pricing power
owned by an enterprise reflects the position of its products in the market. In this case, the price signal may no longer be able to affect such products.
[3]
Value
[
edit
]
A long thread in economics (from Aristotle to classical economics to the present) distinguishes between exchange value, use value, price, and (sometimes) intrinsic value. It is frequently argued that the connection between price and other types of value is not as direct as suggested in the theory of price signals, other considerations playing a part.
[4]
Speculation
[
edit
]
Financial
speculation
, particularly buying or selling assets with borrowed money, can move prices away from their
economic fundamentals
.
Credit bubbles
can sometimes distort the price signal mechanism, causing large-scale malinvestment and
financial crises
. Adherents of the
Austrian school of economics
attribute this phenomenon to the interference of
central bankers
, which they propose to eliminate by introducing
full-reserve banking
. By contrast,
post-Keynesian economists
such as
Hyman Minsky
have described it as a fundamental flaw of
capitalism
, corrected by
financial regulation
. Both schools have been the subject of renewed attention in the Western world since the
financial crisis of 2007?2010
.
[5]
[6]
[7]
Price discrimination
[
edit
]
Firms use
price discrimination
to increase profits by charging different prices to different consumers or groups of consumers. Price discrimination may be regarded as an unfair practice used to drive out competitors.
[8]
See also
[
edit
]
Further reading
[
edit
]
References
[
edit
]
- ^
Boudreaux, Donald J.
"Information and Prices"
.
The Concise Encyclopedia of Economics
. Library of Economics and Liberty (econlib.org)
. Retrieved
18 June
2017
.
- ^
Hayek, Friedrich (1945). "The use of knowledge in society".
American Economic Review
.
XXXV
(4): 519?530.
JSTOR
1809376
.
- ^
"Cartels"
.
Australian Competition and Consumer Commission
. 2013-01-09
. Retrieved
2021-04-25
.
- ^
Schroeder, Mark (2016),
"Value Theory"
, in Zalta, Edward N. (ed.),
The Stanford Encyclopedia of Philosophy
(Fall 2016 ed.), Metaphysics Research Lab, Stanford University
, retrieved
2020-11-09
- ^
Gopinath, Gita (April 14, 2020). "The Great Lockdown: Worst Economic Downturn Since the Great Depression".
International Monetary Fund
.
- ^
Dequech, David (2012). "Post Keynesianism, Heterodoxy and Mainstream Economics".
Review of Political Economy
.
24
(2): 353?368.
doi
:
10.1080/09538259.2012.664364
.
ISSN
0953-8259
.
- ^
Lavoie, Marc (2006), "Post-Keynesian Heterodoxy",
Introduction to Post-Keynesian Economics
, Palgrave Macmillan UK, pp. 1?24,
doi
:
10.1057/9780230626300_1
,
ISBN
978-1-349-28337-8
- ^
Jonathan Nitzan
and
Shimshon Bichler
,
Capital as Power: A Study of Order and Creorder
, Routledge, 2009, p. 228.
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