Fisher Price

In economics and business, the price is the assigned numerical monetary value of a good, service or asset. more...

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The concept of price is central to microeconomics where it is one of the most important variables in resource allocation theory (also called price theory).

Price is also central to marketing where it is one of the four variables in the marketing mix that business people use to develop a marketing plan.

Conventional definition

In ordinary usage, price is the quantity of payment or compensation for something. People may say about a criminal that he has 'paid the price to society' to imply that he has paid a penalty or compensation. They may say that somebody paid for his folly to imply that he suffered the consequence.

Economists view price as an exchange ratio between goods that pay for each other. In case of barter between two goods whose quantities are x and y, the price of x is the ratio y/x, while the price of y is the ratio x/y.

This however has not been used consistently, so that old confusion regarding value frequently reappears. The value of something is a quantity counted in common units of value called numeraire, which may even be an imaginary good. This is done to compare different goods. The unit of value is frequently confused with price, because market value is calculated as the quantity of some good multiplied by its nominal price.

Theory of price asserts that the market price reflects interaction between two opposing considerations. On the one side are demand considerations based on marginal utility, while on the other side are supply considerations based on marginal cost. An equilibrium price is supposed to be at once be equal to marginal utility (counted in units of income)from the buyer's side and marginal cost from the seller's side. Though this view is accepted by almost every economist, and it constitutes the core of mainstream economics, it has recently been challenged seriously.

There was time when people debated use-value versus exchange value, often wondering about the Diamond-Water Paradox. The use-value was supposed to give some measure of usefulness, later refined as marginal benefit (which is marginal utility counted in common units of value) while exchange value was the measure of how much one good was in terms of another, namely what is now called relative price.

That debate is no longer useful in talking about price.

Relative and Nominal Price

The difference between nominal price and relative or real price (as exchange ratio) is often made. Nominal price is the price quoted in money while relative or real price is the exchange ratio between real goods regardless of money. The distinction is made to make sense of inflation. When all prices are quoted in terms of money units, and the prices in money units change more or less proportionately, the ratio of exchange may not change much. In the extreme case, if all prices quoted in money change in the same proportion, the relative price remains the same.

Read more at Wikipedia.org