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The theory of price in economics is both profound and tremendously useful. First, of all the theory of price claims that price will influence both suppliers and customers. Price is a matter of communication in economics.

Price, a matter of communication in economics, is useful by communicating simultaneously to both customers and to other potential would-be suppliers. The first principles of price:

1. If price increases, demand decreases; inversely, if price decreases, demand increases. 2. From a supplier's perspective, if price increases (enough) more of something will be
supplied, if the price of something decreases (enough) less of something will be supplied.

Only decision-makers move the prices

Because economics seems mysterious and complex to some people, there is psychological tendency for people to think that these things happen automatically, like a mechanism, like gravity or magnetism. Yet, price increase and decreases come from only one source: business decision-makers, and consumer decision-makers. People in their price-setting and buying habits move prices up or down.

In economics, examples are almost always necessary. A storefront example seems to provide the easiest explanation.

If a shop owner realizes that a particular good on one of his shelves, cereal is not coming off the shelf fast enough, he has the ability to lower price on his shelf to empty them out. Simultaneously, if he sees that computer paper doesn't stay on the shelf long, he may increase the price of computer paper. By watching the circulation of his shelves, he has the ability to perceive the purchasing habits of his local community. The demands would almost never be unique to his store and may indicate a shift in the local cultural mentality. For example, people eating low-carb diets and buying more computers may account for cereal sitting stagnant on the shelves, and computer paper moving more quickly off of them.

Price is a Powerful Communicator

Simply by seeing the price of computer paper increasing throughout many shops in the area, a local businessman may realize that he indeed could make more money supplying computer paper to the local economy. The simple price motions of the shopkeepers communicated to the businessman that more paper is needed in the area and that he should start producing and/or supplying computer paper.

Inversely, consider another businessman sees that the price of cereal is continually dropping and he has been deciding whether he should stay in breakfast foods or switch to meats and cheeses. This substantial fall in cereal price may be a powerful enough indicator that it is indeed time to start producing meats and cheeses.

Consider how intricate, delicate, and ultimately fascinating this is. Without saying anything to the two observing businessmen, shopkeepers told the local businessmen that they should produce less cereal and more computer paper. This silent communication happens everyday with every product.

Learn more about this author, Will Emprise.
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