Price

Price is the payment or compensation one party gives to another in exchange for goods or services. When the product is a service rather than a physical good, this payment may be called something else, such as "rent" or "tuition." Prices are shaped by production costs, the supply of the desired product, and the demand for it. A price can be set by a monopolist or forced on a firm by market conditions. Prices are usually non-negative. They can be quoted in currency, in quantities of other goods, or in vouchers.

In modern economies, prices are most often expressed in units of currency. For raw materials, they are typically given as currency per unit of weight, such as euros per kilogram. While prices could be quoted as amounts of other goods or services, barter exchanges of this kind are rare. Prices are sometimes quoted in vouchers like trading stamps or air miles. In certain situations—such as prisons, times of hyperinflation, or parts of World War II—cigarettes have been used as currency. Barter is also relatively common in black market economies.

In many financial transactions, prices are quoted in other ways. For a loan, the cost is expressed as a percentage interest rate, with the total interest depending on credit risk, the loan amount, and the loan period. Financial derivatives and other assets have their own pricing methods. For example, the price of inflation-linked government securities in some countries is quoted as the actual price divided by an inflation factor since the security was issued.

The term "price" sometimes refers to the amount a seller requests for goods or services, rather than the final payment. In business, this requested amount is often called the offer price or selling price, while the actual payment is the transaction price or traded price.

Economic price theory holds that in a free market, the market price reflects the interaction of supply and demand: the price is set to balance the quantity supplied with the quantity demanded. These quantities are determined by the marginal utility of the asset to different buyers and sellers. Supply, demand, and thus price can be influenced by other factors, such as government subsidies or industry collusion. When a raw material or similar good is sold in multiple locations, the law of one price generally applies, meaning the price difference between locations cannot exceed the costs of shipping, taxes, and other distribution expenses.

According to Milton Friedman, price has five functions in a free-enterprise exchange economy with private ownership of the means of production: transmitting information about changes in the relative importance of different end-products and factors of production; providing an incentive for enterprise to produce products valued most highly by the market and to use methods that economize scarce factors; providing an incentive for resource owners to direct resources into the most highly remunerated uses; distributing output among resource owners; and rationing fixed supplies of goods among consumers.

The paradox of value was observed by classical economists. Adam Smith described the diamond–water paradox: diamonds command a higher price than water, even though water is essential for life and diamonds are merely ornamental. Use value was meant to measure usefulness, later refined as marginal benefit, while exchange value measured how much one good was worth in terms of another—what is now called relative price.

Negative prices are very unusual but possible. In such cases, the owner or producer of an item pays the "buyer" to take it away. In April 2020, due to the global health and economic crisis, the price of West Texas Intermediate crude oil for May delivery contracts turned negative, reaching -$37.63 per barrel. This happened because holders of long positions feared they would have to take delivery of crude with no storage space available. In a sense, the price is still positive, but the direction of payment reverses—the seller pays the buyer to take the goods. Negative interest rates are a similar concept.

One solution to the paradox of value comes from the theory of marginal utility proposed by Carl Menger, a founder of the Austrian School of economics. As William Barber put it, marginalist economics brought human volition—the human subject—to the center of the stage as a bargaining tool. Neoclassical economists sought to clarify the choices open to producers and consumers in market situations, suppressing fears that cleavages in the economic structure might be unbridgeable. Without denying the Austrian theory of value as subjective within certain contexts of price behavior, the Polish economist Oskar Lange argued for a serious integration of classical political economy with neoclassical economics.