The Unseen Genius of Prices
We interact with prices every day.
But, what is a price? What do these prices mean? What information do prices convey?
Take a moment to think about it.
If you’re like me – most of the time, those interactions take the form of their sum ballooning wildly out of control and rapidly deflating my wallet during a fabled trip to Target. Sometimes, it looks more like going to the grocery store hungry and tossing all manner of snacks and frozen food goodies into the cart, leaving me with a whopper of a total once I leave Walmart. And we’re all familiar with driving that little bit extra to save a few pennies per gallon at the gas pump as we fill up our cars.
But, that description barely scratches the surface. So, let’s break it down a little bit.
One aspect of the nature of prices is an accounting measurement. As I’m walking through Target, prices tell me the number of dollars I as a consumer must exchange with the store in order to take possession of the goods on the shelves. Take the front section of Target, for example. Perhaps I need to exchange 1 of my dollars with the store to walk out with a new list pad to hang on the fridge, or 3 of my dollars to take home a fall-themed cloth pumpkin trinket, or further back in the store, I need to exchange 60 of my dollars for a new bedding set.
Prices work the same way in the provision of services. Again, the price within this setting reflects the number of dollars we must part with in order to receive the service. At Great Clips, I need to exchange 15 of my dollars for the stylist to provide me with a new haircut. At my house, I need to part with 50 of my dollars for a guy to come and mow my yard.
This same dynamic and exchange works when we swap positions from consumers to providers of goods and services. If you’re artsy (unlike myself), you may need to receive 20 of someone else’s dollars to part with the cool earrings you made. To give an example out of my own past, I used to require parents to part with 15 of their dollars in exchange for giving their child a 30-minute, individualized swim lesson.
Stripping away the specific examples, prices reflect the number of dollars we as consumers must exchange with merchants in order to take possession of goods or receive services. Conversely, if we are the sellers, it reflects the number of dollars we must receive in order for us to part with our goods or offer our services.
Now we’ve got a deeper, perhaps more mechanical understanding of what a price is. But, this still doesn’t capture the full extent of the seemingly magical power of a price.
So, what exactly does a price do that evokes such mythical awe from this author?
Well, it’s a combination of things above and beyond all of what I’ve already mentioned. Namely, we can think of a price as a signal wrapped in an incentive.
I’ll start with the first point – the signal aspect of a price. This signaling aspect of a (changing) price relays information about relative scarcity. Your local farmer’s market or produce section at the grocery store provides some of the best examples. As summer has drawn to a close and fall is upon us, think about the changes you’ve seen in these particular marketplaces.
Plentiful tomatoes, citrus fruits, berries, fresh green beans, and all the corn your hands could bear to shuck characterized the prime summertime selections. Along with vast selections, the prices were relatively low as there was so much produce being harvested. However, now that the temperatures are dropping, and prime growing season has passed, the prices for these fruits and vegetables has begun to climb, and will continue to do so.
I’m buying the same item, so why is the price changing?
It’s now more difficult to cultivate these crops. Because of that, less of these summer varieties make it to market. In other words, these tomatoes, citrus, berries, beans, and corn we gleefully ate throughout summer are more scarce.
As consumers, we don’t need to know the finer intricacies of farming, particular growing seasons, soil characteristics, irrigation and fertilization techniques, or anything else that a farmer needs to know. All we have to do is look at the price for these goods – or in prior language, look at the number of dollars we must exchange with the farmer in order to procure these foods.
Which brings me to the second point – incentives.
These rising prices in particular foods give us an incentive to change our consumption habits. Now, rather than enjoying pitcher after pitcher of fresh squeezed lemonade, the rising price of the lemons tells us, “maybe it’s time to switch to Country Time, because these fresh lemons are busting my grocery budget.” Similarly, rising prices of fresh green beans suggest that it’s time to switch to canned green beans and to whip up that green bean casserole.
So, the next time you’re out doing your shopping, take a little extra time to consider what all those numbers on the shelves at the store are really telling you – beyond your final checkout total.
Dr. Jessi Troyan has her PhD in Economics from George Mason University and is the Development Director of the Cardinal Institute for West Virginia Policy.