Price Amount

Price Amount

Price, the amount of money given in exchange for a commodity or service; in other words, the value of a commodity or service in terms of money. In buying goods and some services it is called 'price'; in hiring labour services 'wages ', 'salary', 'fee', etc.; in borrowing money or capital 'interest'; in hiring land or building 'rent'.

Price is determined by the interaction of supply and demand. If demand increases the price tends to rise and vice versa; if supply increases the price tends to fall and vice versa. The extent of the change in price is determined in the first case by the elasticity of supply and in the second by the elasticity of demand.

In a free market prices perform two main functions: (a) they indicate to producers whether supply needs to be adjusted to changing demands, (b) they ration available supplies among consumers. If prices are prevented from reaching the 'equilibrium' level at which the total demand and supply tend to be equal, it is difficult to know how much of each commodity or service the public demands, that is, how it wishes to allocate its purchasing power between all the commodities or services available. For example, if rents are pushed below the free market level a housing shortage is created which it may be impossible to remove except by subsidizing house-building.

More generally in the community at large prices are not only indicators of changing supply and demand but also forms of income. Wages and salaries are not only the price of labour but also its income. There may therefore be social and political resistances to allowing wages or salaries to vary freely in order to adjust supply to demand. For example, the prices of the primary products of the underdeveloped countries, such as cocoa, coffee, rubber, sugar, tea, tin, wheat and others, would tend to fluctuate with changing harvests and world demand. Such fluctuations would be desirable to stimulate the required adaptation of supply to changing demand. But some of these countries, such as Barbados, Bolivia, Mauritius, Burma Brazil, depend on one or two main products, and changing prices mean changing standards of living for many of their inhabitants. Hence the attempts to stabilize prices by output regulation schemes, buffer-stock schemes, bulk sale contracts, marketing boards, etc. Such methods often have some success in the short run but tend to weaken in the longer run as populations grow, new supplies are opened up, old sources dry up and industrial techniques change.

If price cannot be used to indicate changes in supply and demand and to ration' available supply among the 'demanders', a substitute method must be used. Supplies of productive equipment such as building materials can be allocated by licensing, and consumer goods can be rationed by coupons (which thus replace money). If such substitutes for prices are by-passed by 'black markets', 'illegitimate trading', etc., they may require strict legal penalties.

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