Sunday, October 30, 2011


The term prices, according to the oxford dictionary, means archaic value; worth. I agree with this definition, but only to an extent. To me, prices are the value of everything you must sacrifice to perform a certain action. This can be shown with the amount of time and money one must spend when shopping, as well with the energy and coordination one must use to type a paper, and these scenarios only present two of the many actual expenditures one must do to perform any action. With this in mind, I will go out on a limb and say that any rational person would make decisions based on self-interest, whereas the benefit to themselves outweighs the cost to themselves. Even if someone chooses randomly, it is because they feel picking randomly is better than trying to pick purposefully, thus still motivated by self-interest. Since self-interest is measured in utility and utility is entirely subjective and unquantifiable then understanding the true price of something is difficult. Because of the important nature of understanding prices, determining the actual price of our actions is key in not just economics but also life in general.

In my last blog I talked about how the more informed a person was about the costs of an action, the more likely they were to achieve what was in their best interest. Since rational people regularly decide to act upon their best self-interest, obtaining this information is imperative to achieving maximum marginal utility benefit in any situation. Since wealth is created when someone trades something for something else they would rather have, and people act in their own self-interest, mutual benefit occurs. The only time this doesn’t happen is when the supplier or the demander is misinformed or uninformed on the true costs of their actions. Thus having the same information is essential in a mutually beneficial transaction, and because mutually beneficial transactions are a positive externality of a market it benefits everyone in the long run. The price someone will charge for anything is determined by the information that they know, and that is why there is an extremely high demand for information. With the advent of the information age, where the private and societal costs are so low to obtain information, people are becoming more well informed and the amount of positive externalities associated with transactions is on the rise. This is reflected by increases in life expectancy, living conditions, and overall wellbeing in countries with this low cost of information. The nations in our world that support open access to information have shown impressive growth in their respective economies, like South Korea and the United States. This is because like I said there will be more positive externalities in a well-informed market due to the increase of mutually beneficial exchange. Prices are determined by the information we know, and when everyone has good information they can exchange much more efficiently and set prices at where they truly should be. This will create positive growth in any economy and allow for a much better distribution of resources. When people are afraid of prices they tend to misunderstand them and this can lead to poor allocation of resources like the crusades or the holocaust.

All in all, not every price will be right. But the closer we get to understanding the real price of the actions we choose the sooner we will achieve some sort of utopia where resources are allocated as efficiently and effectively as possible. So it seems prices are our friends, and should not be viewed as the enemy.

No comments:

Post a Comment