Prices Communicate Scarcity
What Prices Communicate
In chapter three of The Seen, the Unseen, and the Unrealized by Bylund, he discusses the value of production and how money is attributed to that value for consumers and producers. Bylund (2016, p. 28) mentions that people produce in order to consume in our economy. I agree with this statement when it is put in these terms because we would not use our time and resources to produce if we did not want something in return. We value our time, so when we use it to produce goods and services for others, we must value the return more, which in this case is money to buy products and services that we want. This leads to Bylund’s next point of how prices are created.
As we discussed in the previous chapter, prices of consumption goods are directly related to the value consumers place on the goods and their ability to satisfy real wants (Bylund, 2016, p. 31).
When we value something, we typically do not mind paying a certain price to obtain that product or service. However, there reaches a point that the price is too high and exceeds our value for the item, and therefore we walk away because it is not worth the purchase. Bylund explains that this reason creates the market prices that we see because they are reasonable enough for consumers and high enough that it is still valuable for the producers to continue production without losing money. Bylund (2016, p. 34) further explains that entrepreneurs bid for products to help with their business because they see that consumers want the product, which in turn will generate revenue for them in the future. Entrepreneurs also determine what is valuable to them before pursuing it to ensure that they are not wasting their time and efforts as well.
I began a small business in high school because I realized that I could create things that people want using activities that I enjoy doing. I started creating custom shirts and signs for friends and family, which soon spread by word of mouth and social media. The most difficult aspect of the business was creating prices that would be affordable to customers, but also provide me with a profit that covers costs and the value of my time. Some of the projects I get asked to do are not easy, so I must determine whether I can charge them enough to make it worth it for both myself and the customer. This relates to what Bylund has to say in this chapter because prices communicate value for the product or service. There is so much that goes in to producing products that customers do not always realize that when a price is high, it is because there is a lengthy process behind the scenes that is not visible. Along with this, Bylund explains that entrepreneurs choose their costs.
Their reservation price is the minimum they’re willing to accept as payment in the present for the simple reason that they expect they’ll get at least this price in the future – and that it is therefore worth more to wait rather than sell (Bylund, 2016, p. 37).
Entrepreneurs must have a minimum price that they sell their product for to breakeven and hope that their product is still worth more than that price to be profitable in the future. When creating a product, you must use minimal resources that will still add quality to your product but will also be cost efficient to maximize profits. This is essentially how entrepreneurs choose their costs because the production process and materials you choose determines the profits from total costs. Because of this, you also must determine if the business is feasible by guaranteeing that you can profit off it. To summarize this chapter, Bylund (2016, p. 44) explains that,
…the purpose of production is to facilitate consumption.
We only produce for others to consume it so that we therefore get the things we want in return, which creates a continuous cycle of production and consumption. This chapter thoroughly explains how prices communicate what products are worth through the value we attribute to them.
The Use of Knowledge in Society
Hayek discusses the importance of knowledge about scarcity in relation to price mechanisms. In the beginning of the essay, Hayek writes about allocation of resources.
It is rather a problem of how to secure the best use of resources known to any of the members of society, for ends whose relative importance only these individuals know (Hayek, 1945, p. 520).
In this section, Hayek explains that knowledge of resources must be utilized in certain manner for only those who it relates to. This makes sense that those who know how to use resources take charge and protect that information from others who do not to work more efficiently in the economy. Hayek goes on to explain the role of planning by either one central authority or multiple (1945, pp. 520-521). I believe that planning, in this sense economic direction, should be dispersed among people rather than one central organization. With the topic of knowledge, everyone is skilled in different topics. When having more than one person taking charge, the economy is in a better position to thrive than one authority that may not have all of the knowledge to succeed.
It is with respect to this that practically every individual has some advantage over all others in that he possesses unique information of which beneficial use might be made, but of which use can be made only if the decisions depending on it are left to him or are made with his active cooperation (Hayek, 1945, p. 522).
This follows my rationality about a divided economic system. Every person has a piece of knowledge that is unknown to others, which puts them at an advantage in specific cases. Spreading this knowledge is not always beneficial to others because then we lose the advantage and sometimes information is not the same when others try to replicate it. This relates to entrepreneurship in the sense that everyone contains special skill sets to assist in running a business and creating a unique product. Hayek lastly explains the role of price mechanisms and scarcity and the impact it has on the economy.
The most significant fact about this system is the economy of knowledge with which it operates, or how little the individual participants need to know in order to be able to take the right action (Hayek, 1945, p. 527).
In this case, the economy always works itself out without everyone having the knowledge of what is happening. When production levels decrease, prices adjust accordingly to make up for the low products until production can increase again. Products can be shifted to alternatives and consumers will change their actions accordingly to comply with the scarcity. This is true of the economy that we see today with Covid-19 because production levels have decreased due to limited supply. As consumers, we shift to other products to satisfy our needs, or pay the extra cost depending on our needs. Price gouging works accordingly to keep materials from being completely depleted, and just increases to the value of the product at that time. Products become more valuable as quantity decreases, increasing the price to limit purchases unless necessary. In conclusion, individuals possess knowledge that benefits the economy in order to keep production and consumption going.
Resources
Bylund, P. L. (2016). Chapter 3: What Prices Communicate. In Seen, the unseen, and the unrealized: How regulations affect our everyday lives (pp. 27–45). essay, Lexington Books
Hayek, F. A. (1945). The Use of Knowledge in Society. American Economic Review, 35(4), 519-30