An example of Austrian Pricing Theory --
According to Austrian Pricing Theory, the determination of market prices of goods must be separated into different categories, depending on the characteristics of the usage of the good itself. For simplicity, only the demand side will be considered here, although any final actual concrete price will depend on supply as well. Also the question of competition will be ignored here for simplicity.
The first major category is the first order good, otherwise known as a consumer good. Its price is determined by the subjective ranking of the satisfaction that consumers expect that the good can be used to provide, relative to the satisfaction that a consumer expects to result from the holding of the amount of cash (to be used for alternate purchases in an uncertain future) that would be needed to purchase the good. At any given price, each consumer will independently determine how much of the good, if any, he will purchase or demand. When all potential consumers are taken into account, each given price can be associated with a total demand made up of the sum of all the demands of the individual consumers. This can be thought of as a demand vs price curve, even though each individual consumer pays no attention to it and simply either buys or refrains from buying as required to produce his own higher subjective satisfaction in the use or non-use of the good.
The second major category is the higher order good, otherwise known as a production good. All higher order goods derive their value, and eventually their market price, from the subjective value that consumers place on the first order consumer goods that require the production good.
The major category of higher order or production good can be broken up into two minor subcategories. The first of these consists of production goods that are specific to the production of a single consumer good. The second consists of production goods that are required for the production of more than a single consumer good. These will be referred to as specific production goods and non-specific production goods, respectively.
While the above is not complete, hopefully an example will help clarify just how things work out.
Assume a free market and a consumer good called Tylenol, a headache relief capsule. People can usually live without it, but a large number of people have some use for it. Since it is not vital, price increases tend to quickly reduce demand and enter a price elastic demand region where price increases reduce total revenue and thus are not carried through.
Assume a consumer pseudo-good called KDP, for kidney dialysis prevention. It only is effective for a small part of the population, but it has a very high subjective value for those for which it is useful. The pseudo-good KDP consists of a daily dose of two capsules. One capsule is the common headache relief product, Tylenol, and the the second capsule is a specific capsule which has no other use and is called Lytenol.
From the above we see that when used for headache relief, Tylenol is a first order good consumer good, and will be produced in high volume and sold at a relatively low market price.
OTOH, when Tylenol is used in KDP, it is a non-specific production factor, adding only a small amount of unit demand for Tylenol, and not significantly changing its market price.
KDP is a relatively low volume, highly valued and priced consumer product. These characteristics are transmitted directly to its specific production factor, Lytenol. The market price of Lytenol cannot be higher than the market price of KDP minus the market price of Tylenol without impacting either profits or volume.
I have no reason to believe that the above is clear, but expect that any further attempt at clarification would be counterproductive without some feedback as to just what is least clear. This is both very complicated and in conflict with the mainstream view that market prices are determined by costs, when in fact all market prices are eventually derived from the subjective valuations placed on first order or consumer goods.
Any comments appreciated.
Regards, Don |
