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Tuesday, November 20, 2012

Market Prices

Market prices are determined by the bargaining between suppliers and demanders. Price determination by supply and demand is illustrated with a thought experiment that uses a fixed quantity of a perishable product (i.e., green peas) and known maximum valuations of consumers.

LET US ASSUME THAT there are butchers on one side, and buyers on the other. The price of meat will be determined after some bargaining, and a pound of beef will be valued in silver [i.e., money] approximately the same as all beef offered for sale in the market [i.e., supply], is to all the silver brought there to buy beef [i.e., demand].
This proportion [or price] is settled by bargaining. The butcher sets his price according to the number of buyers he sees, while the buyers, on their side, offer less if they think the butcher will make fewer sales. The price set by some is usually followed by others. Some are cleverer in marketing their merchandise, others in discrediting them. This method of fixing market prices has no exact or geometrical foundation, since it often depends upon the eagerness or the abilities of a small number of buyers or sellers. However, it does not appear that it could be done in a more suitable way. It is clear that the quantity of products or merchandise offered for sale, proportioned to the demand or number of buyers, is the basis on which is fixed, or always assumed to be fixed, actual market prices. In general, these prices do not vary much from intrinsic value.
Let us take another case. Several hotel managers have been told at the beginning of the season to buy green peas. One owner has ordered the purchase of 10 quarts for 60 livres, another 10 quarts for 50 livres, a third 10 quarts for 40 livres, and a fourth 10 quarts for 30 livres. If these orders are to be carried out, there must be 40 quarts of green peas in the market. Suppose there are only 20. The sellers, seeing many buyers, will keep up their prices, and the buyers will come up to the prices asked, so that those who offer 60 livres for 10 quarts will be the first served. The sellers, seeing later that no one will go above 50, will let the other 10 quarts go at that price. Those who had orders not to exceed 40 and 30 livres will go away empty handed.
If instead of 40 quarts there were 400, not only would the hotel managers get the green peas much below the sums laid down for them, but the sellers, in order to be preferred over the others by the few buyers, will lower their green peas almost to their intrinsic value, and in that case, many managers who had no orders will buy some.
It often happens that sellers, who are too stubborn in keeping up their price in the market, miss the opportunity of selling their products or merchandise to their advantage and are thereby losers. It also happens that by sticking to their prices, they may be able to sell more profitably another day.
Distant markets can always affect the prices of local markets: if wheat is extremely expensive in France, its price will increase in England and in other neighboring countries.
Essay on Economic Theory, An

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