The Approach to Price Determination

Abstract

The main approaches to price determination in the relevant literature can be traced to two different price theories.1 One is the neoclassical approach, based on equilibrium theory. The other is the Marxist approach, based on the labour theory of value. In this chapter, both of these approaches are discussed. The issue of price determination will be examined here in two stages: first we examine positively how price is actually determined; and then we analyse normatively whether the objectively determined price is national, reasonable, or justified. In the first stage, we only consider the neoclassical approach, since the Marxist approach is mainly based on the value judgement that it is only labour that creates value. Even Marx himself admits that, in the capitalist economy, price is never actually determined according to labour embodied.2 The neoclassical approach is examined in section 1 and a different approach to price determination based on the concept of sub-equilibrium is put forward in section 2. Extending the partial analysis of a single market in section 2 to a general analysis of a multi-market system, section 3 introduces the concept of sub-equilibrium into general equilibrium analysis. It points out some theoretical defects of the general equilibrium theory and shows that the introduction of the concept of sub-equilibrium and the establishment of a dynamic model can remedy these defects. Section 4 normatively judges the sub-equilibrium price, compared with both equilibrium price and the price according to the labour theory of value.KeywordsMarket PriceEquilibrium PricePrice DeterminationPrice AdjustmentEquilibrium QuantityThese keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.