What Prices Communicate
One of the main things I got from Chapter 3 What Prices Communicate was how a specific price of a good all comes down to how the producer received that good and what his and her valuation is over that good. There is so much more that producers have to do to satisfy others. Bylund says
“but whereas this point could seem obvious there is more to it than the fact that you have to bake bread before you can eat it” (Bylund 2016).
Bylund including this helps me understand a little bit more how much more goes into a producer satisfying a consumer. He mentions that there is more to just baking bread before you can eat it. So I started thinking of the whole process of making a loaf of bread. In the chapter, Bylund talks a little bit about the Four Factors of Production which I have actually been learning about in my Microeconomics class. There's Land (natural resources), Labor (an effort that humans contribute), Capital (machinery), and lastly Entrepreneurship (combines all land, labor, and capital). For the loaf of bread to be made you will need to include all those factors in the process. With no money, there is no purchasing of goods that will make the bread, with no oven or mixer, there will be no bread baked, with no one putting in the effort to making the loaf of bread, there would be no bread, and with no bread, there would no satisfaction of hunger.
Bylund explains that as an entrepreneur there comes uncertainty. He includes a story about a girl named Adele who saw an opportunity in the market to sell apples because she believes that it is a good use of her time. However, Adele's uncertainty comes from the market and technological side of producing apples. This is why some might choose to become employees rather than an entrepreneur due to the amount of uncertainty that one may run into.
I agree with the overall points that this chapter has shown me and I am able to connect with them due to my work experience working in retail. It is not an easy process when it comes to buying from wholesalers and picking out items that will sell and do well in our market. Sometimes we will order things that we think will do a phenomenal job but instead, they sometimes end up not even selling. There is then the whole process of coming up with a price for the items. We always want to make reasonable prices for the consumers in order for them to feel like they are gaining value from what they are purchasing, however, we still are needing to make a profit from them. After working in retail for a little bit now you can never truly tell when the market is going to change. The market is always changing and will continue to do so and I feel as though a successful entrepreneur is one who is able to keep up with the upcoming trends and being able to meet the needs that consumers are wanting to be met.
The Use Of Knowledge In Society
In this article, Hayek argued that the decentralized nature of markets, rather than central planning, is better suited to using individuals' dispersed knowledge and allocating resources efficiently.
What I got from Hayek is that there is more to the price mechanism. The price system is where knowledge amongst individuals is communicated and utilized. Prices communicate information about which commodities and services are in demand and at what level they should be provided. Hayke includes a tin example explaining how tin is scarce and that the prices tend to go up. However, with prices still being high those people who use it or need it will pay anything for it, metaphorically it could cost someone an arm and a leg and they would still pursue to pay for it because it has value. Hayek explains that consumers do not have to know why or how tin is so scarce, it is what they would do or say pay for them to receive it.
“Of course, these adjustments are probably never “perfect” in the sense in which the economist conceives of them in his equilibrium analysis. But I fear that our theoretical habits of approaching the problem with the assumption of more or less perfect knowledge on the part of almost everyone has made us somewhat blind to the true function of the price mechanism and led us to apply rather misleading standards in judging its efficiency” (Hayek 1945, p. 527).
This statement shows me that since economists tend to assume perfect knowledge, they have used misleading standards to judge the effectiveness of the pricing mechanism, and instead, there should be a more realistic approach required to properly evaluate its function in the economy.
Conclusion
Both authors highlighted the complicated process of satisfying clients as well as the level of uncertainty that businesses encounter in the market. The prices we see on goods are not just numbers thrown on there by the seller, they, however, communicate information about the value of goods, services, and factors that all go into producing them. The price mechanism plays a very important role in our economy.
References
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.
As you stated, there is way more going into figuring out the pricing of a good besides just "baking the bread". Before reading this paper, I did not understand the full four components that go into making a product. There is the land which gives natural resources, wood, coal, water, dirt, etc. There is labor, the process of putting the products process in action. Capital, the machinery that is capable of producing a product in mass, and lastly, entrepreneurship. The process of putting the product from the prototype to selling on selves. No product in the economy that you see was brought to shelves without all four of these components. I agree that entrepreneurship is full of uncertainty. Like the story you talk about with Adele producing apples, she was unaware of the uncertainly of the weather and animals. Like you stated, she might have learned there is too much uncertainty for her to peruse her entrepreneurship but is still capable of being employed rather than owner. Having come experience in retail like you, I think the biggest struggle is
From my experience, figuring out a price to where the consumer feels like they got a good deal, but not good enough to where I made no profit, is one of the hardest segments to entrepreneurship. I agree that the market changes non-stop. One day eggs are $2.50, the next, $6. But as you stated, the great entrepreneurs are able to adopt to these changes and meet the customer needs no matter what the market looks like. For example, Nike is able to produce shoes or clothing for a cheaper price for those who are struggling financial. Entrepreneurs would rather lower there expectations rather than loose customers. Being able to adapt to the economy while maintaining their expectations is key. I agree that communication needs to be present when it comes to pricing objects. You must be able to see what products have "more value", and what is considered in demand. If you are creating a backpack with a ton of zippers, but minimalist style is in, then you needs to account for that and price your product accordingly. You must be in touch with trends and the economy if you want to keep up.
I completely agree with the points you stated in the beginning of this essay. I never fully understood how pricing works when you are an entrepreneur. So much production is put into place when making the product, and this helps us understand the pricing of the product.
When learning how a product is made I did not know there was a specific term for all of the steps. The four factors of production helped me understand more completely what all needs to happen in order for a product to be produced. I realized that producing a product you make is not as simple as it seems. Without these four factors people would need be able to get some of the necessities they need in order to live.
I agree with what you said about uncertainty. I feel like when you are an entrepreneur the biggest risk is the unknown. The market is constantly changing so it's hard to predicate if your product will do well or not. Uncertainty also causes for people to not know how production will go for their product. Will all this uncertainty I agree with your statement about how most people would rather be employees than an entrepreneur. Many people today would rather stay in safe work space than take risks with their career.
I agree with the point you brought up about prices are considered base off of demand. For example, when covid first hit America toilet paper was in high demand because people were fearful of how long they would have to stay in their homes for. This demand for toilet paper caused prices to rise and to this day are still rising even after covid. The economy is constantly going back in forth on what is high demand and what is not. This problem causes prices to fluctuate as the economy is changing. This essay was a great read and helped me better understand the readings once I read your view point. It's crazy how the economy is never the same and prices are always changing. It was interesting to read about how prices are not just picked at random, and each price of a product has a specific reasoning behind it.