Price
People 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.[1][2]
Money prices
In a 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.[2]
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.
References
- ↑ Ludwig von Mises. "1. The Pricing Process", Human Action, online edition, Chapter XVI. Prices, Mises Institute. Referenced 2009-05-11}.
- ↑ 2.0 2.1 Murray N. Rothbard "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." Cite error: Invalid
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See also
- The Wikipedia page on price
- The Pricing Process, Human Action
- 1. Money Prices, Man, Economy and State
- Price controls