Markets and prices

A price is the amount of money paid for one unit of a good (a piece, a kilogram, a litre): for example 1 kg of sugar costs 14 000 so‘m. Prices are always compared: a buyer compares different sellers' prices, a firm compares resource prices, a seller compares prices in other markets. In this way price answers three questions: what to produce – the good that gives the most profit; how – with as little cost as possible; for whom – for the buyer who needs the good and can pay the set price. In a market system price performs three functions. Informing: price tells which good is expensive or cheap and helps decisions. Motivating: it becomes profitable to produce a good whose price has risen, so resources move that way; profit tells a producer “carry on”, while a loss says “stop and switch to something else”. Allocating: if a good is scarce, it goes to buyers who are willing and able to pay. Adam Smith held that price is formed by the costs of production (rent for land, profit on capital and wages) and wrote about the market's “invisible hand”.