Naked Science Forum
On the Lighter Side => Famous Scientists, Doctors and Inventors => Topic started by: sooyeah on 21/09/2007 12:26:54
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I was wondering if anyone here knows, how price formation occurs within the market/economy?
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I was wondering if anyone here knows, how price formation occurs within the market/economy?
This sounds like the basis of a wide number of thesis, mostly each looking at narrow subsections of the problem, so I doubt there can be a definitive all encompassing and precise answer to the question.
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I was just wondering.
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In its crudest sense, in an ideal market, the price is determined by how much the customer is willing to pay (but this is strictly an idealised market).
If I have something to sell, then in an ideal market, I will sell that product for the highest price that anybody is willing to pay for it. If you are willing to pay £10 for it, then that is what it is worth to you, but if the next guy is willing to pay £15, then I will sell it to the guy who is willing to pay £15, and that is the price of the item.
The real world is a lot more complex, as you have loss leaders, you also have to consider the cost of production (unless there is another source of income that will cross subsidise a product, you cannot indefinitely sell below cost, and so if the customer is not willing to pay the cost of production, the product will simply not be available for sale). Distortions in the market can also occur due to psychological and political factors. There is also a problem if the market is too small - if there are too few buyers or too few sellers (or either the buyers or the sellers collude to form a cartel, which has the effect of reducing the number of independent buyers or sellers) then you cannot have a properly functioning market.
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PRICES: Signals based on imperfect information due to inefficient unit of exchange. Ideal for flat system of primitive agents acting within frames of barter system. Inadequate to administrate integrated advanced four-dimensional technological distribution system. Humanity should strive to level where prices are replaced by objective distributive tool for efficiently distributing resources.
With subjective prices as basis for distribution, nutrients are overproduced and wasted while hundreds of millions of humans are malnutritioned. Objective needs for water, fresh air and nutrients are neglected in relation to subjective needs like pornography, hamburgers, and automatically warmed-up toilets for rich elite.
That is huge problem, and part of oncoming entropy.
Solution: ENERGY ACCOUNTING (http://en.wikipedia.org/wiki/Energy_accounting)
Re-programme.