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Price

2010-11-09T21:18:15Z

IsmAvatar: Grammar, missing commas

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People [[Trade|exchange]] only if each party values what they receive more than what they give away. The '''price''' is the exchange ratio between the exchanged goods: if Alice trades Bob 4 apples for an orange, the price of an orange is 4 apples. Inversely, the price of an apple is 1/4 oranges. The exchange ratios are now, as a rule, [[money]] prices.<ref name="Mises_prices">Ludwig von Mises. [http://mises.org/humanaction/chap16sec1.asp "1. The Pricing Process"], ''[[Human Action]]'', online edition, Chapter XVI. Prices, [[Mises Institute]]. Referenced 2009-05-11}.</ref><ref name="Rothbard_medium">Murray N. Rothbard [http://mises.org/rothbard/mes/chap2b.asp "4. Terms of Exchange"] Chapter 2 - Direct exchange, ''[[Man, Economy and State]]'', online edition, referenced 2009-05-05. "The price of a good in terms of another is the amount of the other good divided by the amount of the first good in the exchange."</ref>

==Market price==
A market price refers to the special conditions of a concrete act of exchange (of two individuals, that exchanged definite quantities of two definite goods at a definite place and at a definite date). In the end, it is determined by [[value]] judgments of the individuals involved.

A market price is not derived from the general price structure or from the structure of the prices of a special class of commodities or services. What is called the price structure is an abstract notion derived from the many individual concrete prices. The market does not generate prices of land or motorcars in general nor wage rates in general, but prices for a certain piece of land or a certain car and wage rates for a performance of a certain kind. Things are valued based on their power to remove uneasiness.<ref name="Mises_market_price">Ludwig von Mises. [http://mises.org/humanaction/chap16sec13.asp "13. Prices and Income"], ''[[Human Action]]'', online edition, Chapter XVI. Prices, [[Mises Institute]]. Referenced 2009-05-11}.</ref>

==Prices as information==
In a market economy, prices are not arbitrary, but signal real, underlying scarcity and help everyone in the economy adjust his plans in light of reality.

This includes interest rates on various loans. In particular, the market [[interest rate]] coordinates the "intertemporal" (i.e., across-time) activities of investors, businesses, and consumers. If consumers become more future oriented and want to reduce consumption in the near term in order to provide more for later years, what happens in the free market is that the increased savings push down interest rates, which then signal entrepreneurs to borrow more and invest in longer projects. Thus resources (such as labor, oil, steel, and machine time) get redirected away from present goods, like TVs and sports cars, and the freed-up resources flow into capital or investment goods like tractors and cargo ships.

If the interest rates are artificially reduced below their free-market level, it sends a false message to entrepreneurs. Firms begin expanding as if consumers have increased their savings, but in fact consumers have reduced their savings (due to the lower interest rates). Businesses that churn out durable goods, such as furnaces, cargo ships, and houses will find business booming, because these sectors respond positively to low interest rates.<ref name="Murphy_information">Robert P. Murphy. [http://mises.org/daily/3387 "Austrians Can Explain the Boom and the Bust"], Mises Daily, March 2009, referenced 2010-04-27.</ref>

==Money prices==
In a [[Trade#Direct Exchange|barter]] society, prices are established on the innumerable markets of one good for every other good. With the establishment of a [[money]] economy, the number of markets needed is immeasurably reduced. A large variety of goods exchange against the money commodity, and the money commodity exchanges for a large variety of goods. Every single market, then (with the exception of isolated instances of barter) includes the money commodity as one of the two elements.<ref name="Rothbard_medium">Murray N. Rothbard [http://mises.org/rothbard/mes/chap4a.asp "1. Money Prices"] Prices and consumption, ''[[Man, Economy and State]]'', online edition, referenced 2009-05-11.</ref>

With money used for all exchanges, money prices serve as a ''common denominator'' of all exchange ratios. If, for example, one horse exchanges for five ounces of gold and one barrel of fish exchanges for 1/20 ounces, then one horse can be indirectly exchanged for 100 barrels of fish. It must be emphasized that these exchange ratios are only hypothetical, and can be computed at all only because of the exchanges against money. It is only through the use of money that we can hypothetically estimate these "barter ratios," and it is only by intermediate exchanges against money that one good can finally be exchanged for the other at this hypothetical ratio.

In the market, there will always be a tendency for one money price to be established for each good. If the "ruling" market price for 100 barrels of fish, for example, is five ounces—i.e., if sellers and buyers believe that they can sell and buy the fish they desire for five ounces per 100 barrels—then no buyer will pay six ounces, and no seller will accept four ounces for the fish.

The purchasing power of a stock of any good is equal to the amount of money it can "buy" on the market and is therefore directly determined by the money price that it can obtain. In turn, the purchasing power of a unit of money consists of an array of all the particular goods-prices in the society in terms of the unit.

==Formation of prices==
Prices are set by the [[producer]]s. It is in the their interest to secure a price where the produced quantity can be sold at a [[profit]]. In setting this price, the producer/entrepreneur has to consider how much money consumers are likely to spend on the supply of his product, the prices of various competitive products, and the cost of production.

Producers set the price, but they are at complete mercy of the [[consumer]]s, their buying or not buying decides, whether a price will lead to a profit.

If, at a set price, a producer cannot make a profit because not enough people are willing to buy his product, he will be forced to lower the price to boost turnover (and may also need to adjust his costs to make a profit). [[Profit]] is an indication that both producers and consumers have improved their well-being.

When a good makes a profit at a particular price, then it is a signal to entrepreneurs that consumers are willing to support the product at the set price. Prices, therefore, are an important factor in establishing how producers employ their resources.<ref name="Shostak_prices">Frank Shostak. [http://mises.org/story/931 "The Limits of Supply and Demand"], ''[[Mises Institute]]'', posted on 2002-09-04, referenced 2009-05-14.</ref>

==Price controls==
{{Main|Price controls}}

Over the course of history, governments tried many times to regulate prices in some manner, either to set them directly, or by setting minimum and maximum prices.

Price controls rarely succeed even for a short time, and have a long record of failing in the long term, with many adverse consequences.<ref name="Schuettinger_Price_controls">Robert L. Schuettinger and Eamonn F. Butler. "[[Forty Centuries of Wage and Price Controls]]", Chapter 19 - The Economic Effects Of Wage and Price Controls, p. 139-145, referenced 2009-09-11.</ref>

==References==
{{Reflist}}

==External links==
* The [[Wikipedia:Price|Wikipedia]] page on price
* [http://mises.org/humanaction/chap16sec1.asp The Pricing Process], [[Human Action]]
* [http://mises.org/rothbard/mes/chap4a.asp Money Prices] in [[Man, Economy and State]]
* [http://www.econlib.org/library/Enc/PriceControls.html Price controls]
[[Category:Economic concepts]]

Saving

2010-11-09T21:14:22Z

IsmAvatar: Tried to clear up the grammar of the first line.

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To increase [[production]], man must form [[capital]]. To create it, he must restrict his [[consumption]] and transfer his [[labor]] for that period to producing immediately-satisfying consumers’ [[good]]s.

The restriction of consumption is called '''saving''', and the transfer of labor and land to the formation of capital goods is called [[investment]].<ref name="Rothbard_Saving">Murray N. Rothbard. [http://mises.org/rothbard/mes/chap1c.asp#9._The_Formation "9. The Formation of Capital"], [[Man, Economy and State]], online edition, referenced 2009-07-09.</ref>

==Saving and Capital==
It is evident that, for any formation of [[capital]], there must be '''saving''' — a restriction of the enjoyment of consumers’ goods in the present — and the [[investment]] of the equivalent resources in the production of capital goods. This enjoyment of consumers’ goods — the satisfaction of wants — is called [[consumption]]. The saving may result from an increase in the available supply of consumers’ goods. Saving involves the restriction of consumption compared to the amount that could be consumed; it does not always involve an actual reduction in the amount consumed over the previous level of consumption.

Because [[capital]] is perishable, it must be renewed, if man wishes to enjoy the fruits of higher production. Saving must be repeated to preserve the structure of capital, over and over.<ref name="Rothbard_Saving_Capital">Murray N. Rothbard. [http://mises.org/rothbard/mes/chap1d.asp "9. The Formation of Capital"], [[Man, Economy and State]], online edition, referenced 2009-07-09.</ref>

As Mises put it, "saving and the resulting accumulation of capital goods are at the beginning of every attempt to improve the material conditions of man; they are the foundation of human civilization. Without saving and capital accumulation there could not be any striving toward non-material ends."<ref name="Mises_saving">Ludwig von Mises. [http://mises.org/humanaction/chap15sec2.asp#p260 "2. Capital Goods and Capital"], [[Human Action]], online version, referenced 2009-07-10.</ref>

==Saving and the Interest rate==
The act of saving is a means through which man can achieve his ultimate goal, which is bettering his situation. Saving implies giving up some benefits at present - this is the [[price]] paid for the attainment of the end sought. The value of the price paid is called cost, and costs are equal to the value of the satisfaction which one must forego to attain the end aimed at.

The return on savings must be in excess of the cost of savings. If the costs are too high - if savings can’t better an individual’s life and well being - then saving will not be undertaken.

Consequently, the return on savings must be above the premium for man to agree to save. A positive [[time preference]] (i.e., the existence of a premium) precludes the natural emergence of a zero interest rate. Should a zero interest rate be imposed, this will abort all savings and lead to the destruction of the production structure. The premium of having goods now versus having them in the future is getting smaller with the increase in their stock. This, in turn, means that the required return on savings will be lower. An increase in the pool of funding sets the platform for lower [[interest rate]]s.

Apart from time preferences, the purchasing power of money and business risk are important elements in the formation of interest. However, their importance is assessed in reference to the fundamental factor, which is time preference. For instance, if one dollar buys one apple and the agreed interest rate is 10%, then in one-year’s time the lender of the apple would expect to get back 1.1 apples. The lender of the apple will also be happy to accept $1.1 since this sum will permit him to purchase 1.1 apples.

Let's say the purchasing power of money falls, and the price of an apple increases by 10% to $1.1. Now the lender will not accept $1.1 in one year time, since $1.1 will only buy him one apple. He will require $1.21 to agree to lend since $1.21 will secure the lender 1.1 apples.<ref name="Shostak_saving">Frank Shostak. [http://mises.org/daily/1596 "The Subsistence Fund"], Mises Daily, August 2004, referenced 2010-04-23.</ref>

==References==
{{Reflist}}

==External links==
* [[Wikipedia:Saving|Saving]] on Wikipedia
* [http://www.econlib.org/library/Enc/Saving.html Saving] by Laurence J. Kotlikoff
* [http://mises.org/etexts/functionofsaving.asp The Function of Saving] by [[Eugen von Böhm-Bawerk]]
* [http://mises.org/story/1882 Is There a Glut of Saving?] by Frank Shostak
* [http://mises.org/EFANDI/CH4.ASP The Economic Role of Saving and Capital Goods] Ludwig von Mises
* [http://mises.org/story/3203 Did the Fed, or Asian Saving, Cause the Housing Bubble?] by Robert P. Murphy
[[Category:Economic concepts]]