View source for Price signal

{{Short description|Signal to increase or decrease quantity supplied or quantity demanded}}
A '''price signal''' is [[information]] conveyed to [[consumer]]s and [[production (economics)|producer]]s, via the [[price]]s offered or requested for, and the [[Market depth|amount]] requested or offered of a [[commodity|product or service]], which provides a signal to increase or decrease quantity supplied or quantity demanded. It also provides potential [[business opportunities]]. When a certain kind of product is in shortage supply and the price rises, people will pay more attention to and produce this kind of product. The information carried by prices is an essential function in the fundamental coordination of an economic system, coordinating things such as what has to be produced, how to produce it and what resources to use in its production.<ref>{{cite encyclopedia
|url= http://www.econlib.org/library/Enc/InformationandPrices.html<!-- NOTE: This article is an original work by Boudreaux, not available elsewhere -->
|title= Information and Prices
|last1= Boudreaux
|first1= Donald J.
|encyclopedia=The Concise Encyclopedia of Economics
|publisher=Library of Economics and Liberty (econlib.org)
|access-date=18 June 2017}}</ref>

In [[neoclassical economics|mainstream (neoclassical) economics]], under [[perfect competition]] [[relative prices]] signal to producers and consumers what [[production (economics)|production]] or [[consumption (economics)|consumption]] decisions will contribute to [[allocative efficiency]]. According to [[Friedrich Hayek]], in a system in which the knowledge of the relevant facts is dispersed among many people, prices can act to coordinate the separate actions of different people in the same way as subjective values help the individual to coordinate the parts of his plan.<ref>{{cite journal |last1=Hayek |first1=Friedrich |title=The use of knowledge in society |journal=American Economic Review |date=1945 |volume=XXXV |issue=4 |pages=519–530 |jstor=1809376}}</ref>

== Pricing power ==
Alternative theories include that prices reflect relative [[pricing power]] of producers and consumers. A [[monopoly]] may set prices so as to maximize [[monopoly profit]], while a [[cartel]] may engage in [[price fixing]]. Conversely, on the consumer side, a [[monopsony]] may negotiate or demand prices that do not reflect the cost of production. The [[pricing power]] owned by an enterprise reflects the position of its products in the market. In this case, the price signal may no longer be able to affect such products.<ref>{{Cite web|date=2013-01-09|title=Cartels |url=https://www.accc.gov.au/business/anti-competitive-behaviour/cartels|access-date=2021-04-25|website=Australian Competition and Consumer Commission|language=en}}</ref>

== Value ==
{{main|Theory of value (economics)}}
A long thread in economics (from Aristotle to classical economics to the present) distinguishes between exchange value, use value, price, and (sometimes) intrinsic value. It is frequently argued that the connection between price and other types of value is not as direct as suggested in the theory of price signals, other considerations playing a part.<ref>{{Citation|last=Schroeder|first=Mark|title=Value Theory|date=2016|url=https://plato.stanford.edu/archives/fall2016/entries/value-theory/|encyclopedia=The Stanford Encyclopedia of Philosophy|editor-last=Zalta|editor-first=Edward N.|edition=Fall 2016|publisher=Metaphysics Research Lab, Stanford University|access-date=2020-11-09}}</ref>

== Speculation ==
Financial [[speculation]], particularly buying or selling assets with borrowed money, can move prices away from their [[fundamental analysis|economic fundamentals]]. [[Credit bubble]]s can sometimes distort the price signal mechanism, causing large-scale malinvestment and [[financial crises]]. Adherents of the [[Austrian Economics|Austrian school of economics]] attribute this phenomenon to the interference of [[central bank]]ers, which they propose to eliminate by introducing [[full-reserve banking]]. By contrast, [[Post-Keynesian economics|post-Keynesian economists]] such as [[Hyman Minsky]] have described it as a fundamental flaw of [[capitalism]], corrected by [[financial regulation]]. Both schools have been the subject of renewed attention in the Western world since the [[financial crisis of 2007–2010]].<ref>Gopinath, Gita (April 14, 2020). "The Great Lockdown: Worst Economic Downturn Since the Great Depression". ''[[International Monetary Fund]]''.</ref><ref>Dequech, David (2012). "Post Keynesianism, Heterodoxy and Mainstream Economics". ''Review of Political Economy''. '''24''' (2): 353–368. {{doi|10.1080/09538259.2012.664364}}. {{ISSN|0953-8259}}.</ref><ref>Lavoie, Marc (2006), "Post-Keynesian Heterodoxy", ''Introduction to Post-Keynesian Economics'', Palgrave Macmillan UK, pp.&nbsp;1–24, {{doi|10.1057/9780230626300_1}}, {{ISBN|978-1-349-28337-8}}</ref>

== Price discrimination ==
{{main|Theory of value (economics)}}
Firms use [[price discrimination]] to increase profits by charging different prices to different consumers or groups of consumers. Price discrimination may be regarded as an unfair practice used to drive out competitors.<ref>[[Jonathan Nitzan]] and [[Shimshon Bichler]], ''Capital as Power: A Study of Order and Creorder'', Routledge, 2009, p. 228.</ref>

==See also==
*[[Dynamic pricing]]
*[[Pricing power]]
*[[Speculation]]
*[[Supply and demand]]

== Further reading ==
* {{cite book|last=Thomsett|first=Michael C.|title=Practical Trend Analysis: applying signals and indicators to improve trade timing |publisher=Walter de Gruyter Inc. |publication-place=Boston |date=2019 |isbn=978-1-5474-1721-6 |doi=10.1515/9781547401086}}

== References ==
{{reflist}}

{{Microeconomics}}
{{Population}}

[[Category:Pricing]]
[[Category:Information]]