Value is different than price/cost, in that value is subjective. However how does value influence price/cost?
Price is subjective too, yes?
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Consider an economy operating under a pure gold standard, with no government regulation of money. Suppose that there was a "shortage" of gold. In this case, this would be incentive for gold miners to increase production. This guarantees that the value represented by an ounce of physical gold is approximately equal to the cost of mining and refining gold. If there was a "surplus" of gold, then gold mining businesses would close.
If there's no State violence requiring people to use gold as money, then people would switch to silver or other things as money, if the volume of gold was insufficient for trade.
In a true free market, value and price are in equilibrium. It's only in the context of State manipulation of the market that distortions occur. For example, lawyers and hedge fund managers produce nothing, but are highly paid. This is a consequence of State distortion of the market.
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Subjective value doesn't just influence price, it wholly determines price through supply and demand. When the sellers and the buyers have reverse subjective valuations of the items of exchange, an exchange will occur and a price can be observed.
fsk:In a true free market, value and price are in equilibrium.
I'm kind of confused as to why exactly subjective value immediately determines price. Certainly over time it will, but when a firm initially sells a product, it's not based on what it thinks everyone values it at but rather starts at its production cost and increases prices after that (desired/expected revenue). Then if people don't think the product is worth that much to them, they don't buy it and the firm has to lower the price to clear its inventory. As it lowers the price there's an ambiguous point at which people will be content in purchasing it. In that way, prices are subjective, but I don't think you can simply look at the market and examine the prices and say "these are all based on the subjective values of consumers". I might be confused on something though.
banned: I'm kind of confused as to why exactly subjective value immediately determines price. Certainly over time it will, but when a firm initially sells a product, it's not based on what it thinks everyone values it at but rather starts at its production cost and increases prices after that (desired/expected revenue). Then if people don't think the product is worth that much to them, they don't buy it and the firm has to lower the price to clear its inventory. As it lowers the price there's an ambiguous point at which people will be content in purchasing it. In that way, prices are subjective, but I don't think you can simply look at the market and examine the prices and say "these are all based on the subjective values of consumers". I might be confused on something though.
I use to think that a price is a datum that emerges "after" a sale is done. Before someone buys a good, what we call price is not a price but an appraisal in which the seller states that he is willing to give up the good by exchanging X amounts of ..whatever... A price comes into existence when someone actually exchanges.
The value is always only what the buyer, consumer, values, not what the seller values. The sellers value goes into the apraisal. And if his value matches with a buyers value ..bingo.. exchange happens. So prices are always a datum of a past exchange.
banned:I'm kind of confused as to why exactly subjective value immediately determines price. Certainly over time it will, but when a firm initially sells a product, it's not based on what it thinks everyone values it at but rather starts at its production cost and increases prices after that (desired/expected revenue). Then if people don't think the product is worth that much to them, they don't buy it and the firm has to lower the price to clear its inventory. As it lowers the price there's an ambiguous point at which people will be content in purchasing it. In that way, prices are subjective, but I don't think you can simply look at the market and examine the prices and say "these are all based on the subjective values of consumers". I might be confused on something though.
When a new product is first on the market, the price will be arbitrary. The seller will choose a price that covers his costs, and the customers who want it pay.
Over time, price and value move towards equilibrium. If prices are higher than value, then more competitors enter the market and prices decrease. If prices are lower than value, then business close and prices rise.
This arbitrage does *NOT* occur in the present due to State restrictions on the market. For example, the State restricts the supply of doctors, guaranteeing that the price of medical care will be high. Even if I decide "Doctors are overpaid! I'll go get a State doctor license!", then I'm just taking the license away from someone else. I can't choose to work as a doctor without a license from the State. This prevents the price/value equilibrium from occuring with medical care.
For example, suppose you invented a cure for cancer. You could charge $1M and people would willingly pay. In a free market, other people will discover this cure or other cures. In a free market, there's no patents, although you could choose to keep your cure a secret. Over time, the cost of the "cure for cancer" will drop from $1M to the cost of the time it takes to administer the cure. Even though people would willingly pay $1M for a cure for cancer, they only have to pay the cost of the doctor's time.
Cost is also subjective. Try to determine the "real" cost of something, I am not including lost opportunity. Cost is different for different folks. If I have spare time on a machine and I have to pay the crew then the labor and machine time to produce another item is zero, as an example. What is the cost difference between a Hundai and a Corvett? There are so many factors in this that any number is just a computation.
In that way, prices are subjective, but I don't think you can simply look at the market and examine the prices and say "these are all based on the subjective values of consumers". I might be confused on something though.
Only if the seller cannot sell the product. A price is an exchange ratio - it is in the area between the upper limit of what the buyer's willing to pay and the lower limit of what the seller's willing to accept. Anywhere in between that area, the buyer sees greater benefit in buying a good/service and the seller in selling it. Price is objective in that anyone can see it, though it's influenced by subjective factors. To maximize profit, the seller must sell at the point where as many consumers as possible are willing to buy the good and at the same time the seller is willing to provide it (i.e. revenues will exceed costs.) Prices are thus most definitely consonant with the subjective values of consumers buying the product.
-Jon
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Irenicus' Diaries.
So let me see if I understand this. Given that value is subjective, price is determined at exchange contingent upon how much the producer values $$$ more than the good and how much the consumer values the good more than the $$$. The producer/entrepreneur takes a guess with the available datum, taking into consideration cost of production and profit margin. The consumer will value something more if it will unsettle his/her uneasiness.
ViennaSausage: So let me see if I understand this. Given that value is subjective, price is determined at exchange contingent upon how much the producer values $$ more than the good and how much the consumer values the good more than the $$. The producer/entrepreneur takes a guess with the available datum, taking into consideration cost of production and profit margin. The consumer will value something more if it will unsettle his/her uneasiness.
So let me see if I understand this. Given that value is subjective, price is determined at exchange contingent upon how much the producer values $$ more than the good and how much the consumer values the good more than the $$. The producer/entrepreneur takes a guess with the available datum, taking into consideration cost of production and profit margin. The consumer will value something more if it will unsettle his/her uneasiness.
I think you pretty much understand the concept now.
But now you have some more interesting questions of how is cost, profit margin, or the value of money determined.
Zlatko:But now you have some more interesting questions of how is cost, profit margin, or the value of money determined.
I'll take a stab at this.
Cost is determined from the labor, materials, and goods that the entrepreneur utilizes for to create his capital good. A capital good is the product the entrepreneur intends to sell to the consumer (when it becomes a consumer good. or capital good if the consumer uses it to create capital.) It may be the case that the entrepreneur overestimates the value the consumer will pay money for the good, where in the entrepreneur loses money. Here, the entrepreneur will have negative profit, or a loss. If the entrepreneur underestimates or is spot on, the entrepreneur will make a profit. It is up to the entrepreneur to find the balance between cost, price, and profit margin.
Money is a beast on its own. From my understanding, money in a free market is the same as a commodity. It's value is subjective, but typically chosen by market forces for qualities that make it suitable for exchange, ie easily portable, scarce enough to be valued, but plentiful enough to be exchanged, depending on what it is exchanged for.
Wow, can I qoute you :-)
Exactly right i think.