Market price

Prices play an important role in all economic markets. If there were no price system, it would be impossible to determine a value for any goods or services. Prices serve as a link between producers and consumers. Prices, especially in a free market system, are also neutral. That is, they favour neither the producer nor consumer.

Instead, they come about¹ as a result of competition between buyers and sellers. The price system in a market economy is surprisingly flexible. Unforseen events such as weather, strikes, natural disasters and even war can affect the prices for some items.

In economic markets, buyers and sellers have exactly the opposite hopes and intentions. The buyers come to the market larger to pay low prices. The sellers come to the market hoping for high prices. For this reason, adjustment process must take place when the two sides come together. This process almost always leads to market equilibrium⁴ — a situation where prices are relatively stable and there is neither a surplus⁵ nor a shortage⁶ in the market.

In most economic systems, the prices of the majority of goods and services do not change over short periods of time. In general terms, however, the individual cannot change the prices of the commodities he wants. When the individual planning his expenditure, he must therefore accept these fixed prices.

The nature of a commodity remains the same, but its utility changes. This change indicates that a special relationship exists between goods and services on the one hand, and a consumer and his money on the other hand. The consumer’s desire for a commodity tends to diminish as he buys more units of that commodity. Economists call this tendency the Law of Diminishing Marginal Utility¹.

In economics, the term «price» denotes the consideration in cash (or in kind) for the transfer of something valuable, such as goods, services, currencies, securities, the use of money or property for a limited period of time, etc. In commercial practice, however, it is normally restricted to the amount of money payable for goods, services, and securities. In other applications, the word «rate» is preferred. Interest rate¹ is the price for temporary use of somebody else’s money, exchange rate² is the price of one currency in terms of another.

Price may refer either to one unit of a commodity (unit price) or to the amount of money payable for a specified number of units or for something where units are not applicable, e.g., for five tons of coal (total price) or for a specific painting by Rembrandt.

Prices perform two important economic functions: they ration scarce resources, and they motivate production.

Prices may be either free to respond to changes in supply and demand or controlled by the government or some other (usually large) organisation.

LABOUR

There are four major categories of labour that are based on the general level of skills needed to do any kind of job. These categories are unskilled, semiskilled, skilled and professional or managerial.

Unskilled labour. Workers who do not have the training to operate machines and equipment fall into³ the category of unskilled labour. Most of these people work chiefly with their hands at such jobs as digging ditches, picking fruit, etc.

Semiskilled labour. Workers who have mechanical abilities⁴ fall into the category of semiskilled labour. They may operate electric floor polishers, or any other equipment that calls for⁵ a certain amount of skill.

Skilled labour. Workers who are able to operate complex equipment and who can do their tasks with little supervisions fall into the category of skilled labour. Examples are carpenters, typists, toolmakers.

Professional labour. Workers with high level skills such as doctors, lawyers and executives of large companies fall into the category of professional labour.

Most occupations have wage rate — a standard amount of pay given for work performed.

How these rates are determined can be explained in two different ways. The first deals with supply and demand, the second recognizes the influence of unions on the bargaining process⁶.

Human labour produces both goods and services. The activities of a farmworker and a nurse are very different, but both are measurable in terms of payment received. Labour in this sense is not concerned with distinctions of social class, but simply with the payment of wages in return for work. When we talk about «the national labour force», however, we are thinking of all those people who are available for work within the nation, i.e.³ the working population.

It should be noted that any person engaged in private business is not paid a fixed sum for his activities. He is self-employed⁴ and his activities are partly those of an employer⁵ and partly those of an employee⁶. If however he employs an assistant, to whom he pays a fixed wage, his new employee provides labour in return for payment. He receives his wages, while his employer receives the surplus (large or small) from the whole business. This surplus is the reward of private enterprise and is known as «profit⁷».

The theory that uses the tools of supply and demand to explain differences in wage rates is called the traditional theory of wage determination.

When the level of supply is large in relation to demand, wages generally are low. When the level of supply is low in relation to demand as with managers — wages generally are high. In most cases, the higher the level of skills, or grade of labour, the higher the average yearly wage rate³. For example, semiskilled workers will receive more, on the whole, than unskilled workers. Skilled workers will receive more than semiskilled or unskilled workers. Professional workers will receive more than any of the others.

There are, however, some cases in which the traditional theory does not explain the variations in wage rates. Some unproductive workers, for example, may receive high wages because of family ties or political influence. Some highly skilled or productive workers may receive low wages because of race, sex, or where they live.

At times, wages are determined not by supply and demand but by the influence of organized labour and the collective bargaining process.

In these cases, unions do not try to get higher wages for their members on the grounds⁴ that labour is in short supply relative to demand. Nor does management push for lower wages when there is a very large supply of labour. This makes the price of labour-wages hard to define. When negotiating for wages⁵, unions want to know the wage rates in other plants for the same kind of work and what changes have taken place or will take place in the future in the cost of living⁶.