The Science of Demand (33) - Unofficial Translation of Steven Cheung's 经济解释 - 科学说需求

Section 6.  What is Price?

What is price? Price is the highest-valued option forgone at the margin by a willing consumer for a good. What exactly is his highest-valued option forgone at the margin? The answer is: the highest use value of the good at the margin. In the case of a market, exchange value is market price. If the marginal use value of a good is higher than its market price (exchange value), the consumer will buy more; if lower than market price, the consumer will refrain from buying. This is in accordance with the postulate of maximization. Consequently, at the equilibrium point, market price equals marginal use value. As such, market price is marginal use value. (When we later discuss consumer’s surplus, market price may equal average use value. This will be explored in Section 7 of this chapter.)

With the above concept of “price”, several key points have to be clarified:

1. As aforementioned, certain goods have no market; or they are non-pecuniary goods; or market does not exist under certain systems, hence the goods have no market price. In the absence of market price, we need to work on option forgone. Market price equals option forgone, yet option forgone does not necessarily equal market price. In terms of option forgone (exchange with other goods), the equilibrium point is reached when option forgone equals marginal use value. Using option forgone in place of non-existent market price, we have to incorporate the postulate of substitution into the law of demand and make judgment with reference to observable changes in constraints. These have been earlier discussed.

2. Price is always relative. Since there are no non-relative prices, the word “relative” is often omitted. So is option forgone. The so-called relative price means that the price of Good A is always the “quantity” of Good B or other goods that has to be forgone in exchange. If we express the price of Good A in money terms, such monetary amount represents the quantity of Good B or other goods that has to be forgone. Monetary amount is merely a number used to substitute for the marginal use value of goods forgone.

In a system with no market, there is no monetary price. We can therefore only use option forgone to analyze, and this option forgone also equals the marginal use value of the good given up. It is more difficult to analyze without market price, yet guided by the highest-valued option forgone, we can say what is given up is what the demander currently owns.

3. Price is generally measured by present value – the price payable in the future has to be discounted. This is because choice decision is normally made today: if we decide today that decision be made tomorrow, this is a decision today. With no market, hence no market interest rate, analyzing becomes harder. On one hand, we have to utilize the aforementioned highest-valued option forgone at the margin; on the other, we have to refer to other phenomena in order to make objective judgment on the value of time. Time and interest will be expounded in Volume II.

4. Price or option forgone is dynamic which can be further categorized into flow and stock. Periodic payment (like rent) is flow; lump-sum payment to buy a property is stock. Sometimes we use one instant of time instead of flow or stock. The former, often adopted these days, refers to not taking into account the issue of time. There are two key points here: first, in order to avoid contradictory analysis, the dynamics of price must be identical to the dynamics of quantity; second, as long as the dynamics of price and quantity are identical, there are no exceptions to the law of demand.