Money Prices Fundamental

What are money prices, and why are they so important?

Many prices provide market actors with some of the most important information they can have. They indicate how much we’re willing to give up to acquire the products and services available on the market. They give market producers signals as to how much buyers will sacrifice to gain their products. They provide information to people who, quite frankly, should keep their hands off the market.

In spite of the ubiquity of money prices, many people don’t fully appreciate the important role that they play in the operation of free markets. In this newsletter, I want to touch on some of the more important aspects of money prices, but this is only an introduction. I will address the subject of money prices frequently throughout the series of newsletters.

Calculating Money Prices

All prices represent a ratio of what a buyer gives for what he gets in a trade. We can only determine prices after the actors have completed the transaction. We calculate money prices in exactly the same manner — the amount of money given up for the quantity of goods received.

The sticker on a jar of tomatoes does not represent the price. We should use a more accurate term, “offering price” or “sticker price.” This distinction represents a very important point.

We cannot determine whether a seller has set the offering price too high until we measure the number of transactions. If, in fact, the offering price is too high, no one will buy the product.

Do Not Act As Measures of Value

Money prices — the amount of money people actually give up — do not represent measures of value. They give us indications of value, and they provide us with information about which we can make definitive statements about value, but they do not measure value.

Money prices tell us, beyond dispute, that the buyer values the goods he got more than the money he gave up. And, we can say the inverse of the seller — he values the money he got more than the goods he gave up.

Buyer Indicates His Bid by Buying or Not Buying

In many respects, the market acts like a large-scale auction. Sellers indicate what they would willingly accept by posting offering (or sticker) prices. Buyers indicate their bid by either buying or not buying. The back-and-forth that one would see in a normal auction occurs over time and distance.

Signals To The Market For Resource Allocation

Money prices provide very important signals to the market for the allocation of resources. The price established for a single transaction provides a limited amount of information. Again, the buyers and sellers both get something they value more than what they give up.

A series of transactions, unlike an individual transaction, provides us with a pattern of behavior that tells us something about how to allocate resources. Rising prices tend to indicate that sellers in the market are not offering enough of a particular product to satisfy demand. Falling prices, on the other hand, will indicate to sellers that they overestimated the demand for their product.

The price patterns will only offer valid information if the quantity of money throughout the economy is relatively fixed. (This fact opens the door for future discussions about the importance of not having monetary policies—either expansionary or contractionary.)

Conclusion

This article barely scratches the surface of the importance of money prices. Money prices play a role at all levels of the economy. They influence the buying patterns of individual shoppers. They influence the buying patterns of those who sell to consumers. The information carried by money prices works its way from the consumer back to the highest level of the structure of production.

Economists express most economic data in terms of money prices. I will argue in future editions of this publication that, although macroeconomic data provides some rather abstract information, market interventionists (namely the government) cannot use this information more effectively or efficiently than the individual consumers making buying decisions on a daily basis.