Price signal
A price signal is information conveyed to consumers and producers, via the price charged for a product or service, which provides a signal to increase or decrease quantity supplied or quantity demanded. 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
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.
Value
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.
Speculation
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 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.
Price discrimination
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.
See also
References
- 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" (PDF). American Economic Review. XXXV (No. 4): 519–530.
