Price

PRICE. What prices are and what price, as a general con ception, means would seem to be obvious enough. Yet economists, dealing with the relations of prices to different forms of economic activity and with their own interrelations find that they must take pains if they are to keep their conceptions of price clearly de fined and consistent. Thus one may speak of the whole amount of money paid for a quantum of goods as their price, or—if the goods are of a homogeneous or standardized kind, sold by measure, weight, or tale—the amount of money given for each unit of the goods may be regarded as the price. Alternatively, price may be defined, not as a quantity of money but as a ratio between a quantity of money and a quantity of goods. This is generally the more useful conception, but the prices of unique goods, such as works of art, cannot be said to be ratios of quantities. The price ratio is usually stated as so many monetary units (shillings, pounds, dollars) per unit of commodity (ton, yard, bushel). In some markets, however, the ratio is expressed inversely, as so many ounces or yards per shilling, pound, or dollar. This would be a negligible difference if it were not that, as the makers of index numbers have found, where prices or percentage changes in prices are averaged or otherwise combined, precautions must be taken if the results are not to be affected by the particular form in which the price ratios are expressed.

A distinction may also be made between the conceptions of price as a ratio of quantities and as a ratio of values. If ten units of money are required to purchase one unit of a commodity, it may be inferred that a unit of the commodity is ten times as valuable as a unit of money and that the price ratio merely gives expression to that fact. That price is "value expressed in terms of money" is a standard definition. This should not be taken to mean that the values of goods are determined independently of or prior to the determination of their prices, or that the values of goods and of money are determined separately. The factors which determine the values both of goods and of money operate through the processes of exchange, and the values which are thus deter mined appear in the guise of money prices. It is probable, indeed, that the abstract notion of exchange value is nothing more than a generalization of the simpler idea of price. When we say that price is a ratio of values or that price is value expressed in terms of money, we logically imply, not that value is antecedent to price, but either that in respect of each particular transaction the limits within which the ratio of exchange can vary are established by the general state of the market, or that in analysing the factors which determine the price of any one commodity, the value or general purchasing power of money, may often, without too large an error, be assumed to be constant. The conception of the value

of money, in turn, rests upon nothing more tangible than a broad view of all the various prices of different goods and services, but it is nevertheless a useful conception.

The Problems of Price.

The economic theory of price has two principal divisions. One division has to do with the inter relations of the prices of different goods and services, and with the way in which changes in production, consumption, and trade operate directly upon some prices and indirectly upon others. This division of price theory includes that important part of economics sometimes called the theory of value and distribution (or sometimes simply the theory of price-making) and also parts of other fields, such as the theory of international trade. It is concerned both with the tendencies which continually make for a coherent and consistent system of prices and with the subversive forces which make continuously for change. The other division of the theory of prices has to do with the causes of general move ments of prices to a higher or lower level—movement which may continue gradually through a long period of years, but which may be broken by shorter movements, convulsive or cyclical in nature. The study of the long-continued general trends of price, and, in considerable measure, of their shorter movements as well, is commonly made a part of the general theory of money. The reason is not that general changes of prices are always attributable to the action of monetary factors alone, but that they are re flected in and in fact are changes of the value of money. They can be studied most conveniently and effectively by enquiring into the changing relations between the supply of money and credit and the volume of production and trade. In recent years especial attention has been given to what might be called the distortions of the whole interrelated structure of prices which accompany changes in their general level. The movements of certain classes of prices, for example, generally lag behind the movements of other classes of prices in a more or less systematic way.