Price


A price is the direct outcome of individual value preferences. When two people enter into an exchange transaction, the price of the good surrendered is the good demanded in exchange. For example, if someone surrenders a loaf of bread against 2 tomatoes, then the price for the bread in terms of tomatoes is 2 tomatoes. A price is a historical phenomenon. It is expressed in terms of goods exchanged or demanded in exchange between specific individuals for specific goods of a specific quality at a specific moment in time.

A money price is a price expressed in terms of money. Generally, when speaking of prices, people refer to money prices.

For example, if person A assigns a higher value preference to a loaf of bread than he assigns to 5 money units (but not more), he would accept any exchange where he surrenders 5 money units or less against a loaf of bread.
If B assigns a lower value preference to a loaf of bread than he assigns to 3 money units (but not less), he would be willing to surrender a loaf of bread against 3 money units or more.
A and B could enter into an exchange transaction at any price between 3 and 5 units.

If B sets his price at 4 units and A accepts the price an exchange takes place at a price of 4 money units.

A money price is comprised of two components. In our example, the first component is the one that satisfies B’s value preference demands, 3 money units. The second component is a premium that he realizes due to his counterparty’s willingness to pay 4 money units, 1 money unit. We shall call the former component the Value Price Component, the latter the Entrepreneurial Price Component.

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