Relative Price

3 Key excerpts on "Relative Price"

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  eBook - PDF

  Price Theory and Applications

  • Steven Landsburg(Author)
  • 2013(Publication Date)
  • Cengage Learning EMEA

    (Publisher)

  Because microeconomics is concerned only with Relative Prices, from our point of view there is Absolute price The number of dollars that can be exchanged for a specified quantity of a given good. Relative Price The quantity of some other good that can be exchanged for a specified quantity of a given good. 30 CHAPTER 2 Copyright 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. no real difference between those columns. If you woke up tomorrow morning to dis-cover that all absolute prices (including wages) had doubled (or halved), the world would not really be different in any significant way. Relative Price Changes and Inflation Because Relative Prices and absolute prices are determined independently of each other, it is always misleading to attribute an absolute price change to a Relative Price change. It is quite common to hear that there has been inflation (a rise in the level of absolute prices) because of a rise in the price of a particular commodity such as oil, housing, or wine. But we can see from Exhibit 2.1 that a rise in the Relative Price of wine is equally consistent with either a rise or a fall in the absolute price level. In fact, when the Relative Price of wine increases to 4 loaves of bread per bottle, what happens to the Relative Price of bread? It decreases, from ½ to ¼ bottle of wine per loaf. Any increase in the Relative Price of wine must be accompanied by a decrease in the Relative Price of bread. Exercise 2.1 Explain why the preceding statement is true. Inflation is an ongoing rise in the average level of absolute prices.

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  eBook - ePub

  Monetary Macroeconomics

  A New Approach

  • Alvaro Cencini(Author)
  • 2001(Publication Date)
  • Taylor & Francis

    (Publisher)

  Desai’s true interest seems to lie in the variation of the value of money. His analysis is concerned mainly with ‘the reproductive measure of purchasing power’ (Desai 1995: 301), which he relates to ‘the expected requirements to reproduce last year’s standard of living’ (ibid.: 301). His critical assessment of price indices and of their use as indices of variation in purchasing power is a sign of his concern with the need for a better standard to account for the value of money and its variations in time. Yet, his frequency-related indices of purchasing power do not seem to be up to this task. Although they may be used successfully to determine variations in the cost of living, they tell us nothing about variations in the value of money. The point is that, while an increase in macroeconomic prices defines an equivalent variation in the numerical expression of value, the impact of an increase in microeconomic prices (i.e. those with which price indices are concerned) is confined to a new distribution of income.

  The value of money and (macroeconomic) prices are determined simultaneously. This seems to be true for classical, neoclassical and modern economists alike. A major difference exists, however, as to the way prices are determined. Whereas within the classical framework prices are absolute and determined by production, in GEA prices are relative and determined through exchange. Now, the attempt to determine prices through relative exchange is seriously jeopardised by the logical impossibility of considering money as a real good. It is obvious that, if prices are relative, money must be conceived of as a commodity. But, if money is a commodity, what is its price? Can a commodity be, simultaneously, the numerical expression of prices and a real good whose price must be expressed in terms of money? Consider the relative exchange between commodity money m and a real good a. If, for example, 10 units of m are exchanged against 1 unit of a, it can equally well be said that 10 units of m are the price of 1 unit of a, or that 1 unit of a is the price of 10 units of m. Thus, m is no more the standard of good a than a the standard of m. Yet, in order for money prices to be univocally determined, it is necessary to have only 1 unit of measure. The problem can be solved neither by choosing one of the two commodities as a reference nor by arbitrarily assuming that it can be taken to be equal to a mere number. Relative exchange can only occur between real terms, a necessary condition which allows neither for the determination of a unique unit of measure nor for the association of numbers with real goods and services.

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  eBook - PDF

  Microeconomics

  Private and Public Choice

  • James Gwartney, Richard Stroup, Russell Sobel, David Macpherson(Authors)
  • 2017(Publication Date)
  • Cengage Learning EMEA

    (Publisher)

  Relative Prices measure opportunity cost. If cereal is $5 per box when movie tickets are $10, you must give up two boxes of cereal to purchase one movie ticket. Several fundamental principles underlie the choices of consumers. Let’s take a closer look at the key factors influencing consumer behavior. 1. Limited income necessitates choice. Because of scarcity, we all have limited incomes. The limited nature of our income requires us to make choices about which goods we will and will not buy. When more of one good or service is bought, we must buy less of some other goods if we are to stay within our budget. 2. Consumers make decisions purposefully. The goals that underpin consumer choice can usually be met in alternative ways. If two products cost the same, a consumer will choose to buy the one expected to have the higher benefit. Conversely, if two products yield equal benefits, the consumer will choose to buy the less expensive one. Fundamen- tally, economics assumes that consumers are rational—that they are able to weigh the costs and benefits of alternative choices. 3. One good can be substituted for another. Consumers can achieve utility—that is, satisfaction—from many different alternatives. Either a hamburger or a taco might satisfy your hunger, whereas going either to a movie or to a football game might sat- isfy your desire for entertainment. With $600, you might either buy a new TV set or take a short vacation. No single good is so precious that some of it will not be given up in exchange for a large enough quantity of other goods. Even seemingly unrelated goods are sometimes substituted one for another. For example, high water prices in Southern California have led residents there to substitute cactus gardens and reduced flow showerheads for water. 4. Consumers must make decisions without perfect information, but knowledge and past experience will help. In Chapter 1, we noted that infor- mation is costly to acquire.

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