Perception and Circumstance

Value is subjective. The way to prove this is to consider a simple transaction. Let's say we need a pencil.

When we go into a store in need of a pencil, we are typically valuing a pencil higher than the store owner values the same pencil. The store owner would rather have our money than the pencil. If this is not the case, then no transaction will occur. Both the seller and the buyer must feel better off after a transaction. No-one agrees to a transaction in which the outcome is not at least marginally better than no deal. This proves that value must be subjective, otherwise no-one would be better off, and no transactions would happen.

It follows from this that every transaction operates with two prices. There is an offer price, set by the seller, and a bid price set by the buyer. In the case of a store, buyers rarely reveal their bid price. We do not normally haggle to get the price down. But in a market, bid and offer are often both on display.

Note that subjective does not mean random or incalculable. It merely means that something is dependent on the circumstances and perception of individuals.

There are plenty of objective criteria from which to calculate prices. A major factor is the cost of production, which in turn is dependent on circumstances. Oranges can be grown at low cost in Portugal. Codfish can be harvested at low cost in Norway. An exchange of codfish for oranges between Norwegian fishermen and Portuguese farmers is therefore logical, and reasonable prices can be calculated based the cost of production for the two commodities.

The wonderful ting about this is that Portuguese farmers get codfish by growing oranges, and Norwegian fishermen get oranges by catching codfish. It is a win-win situation.

Another objective measure is utility. In the case of the farmers and fishermen, both are very much aware of the utility of their products. Prices are not set randomly, but relative to the utility offered.

Scarcity is also a determining factor. A bumper crop of oranges translates into more oranges per codfish.

The only somewhat incalculable part of this is perception, which plays a relatively minor role when it comes to primary goods such as oranges and codfish.

However, when it comes to more abstract things perception takes an increasing role. In cases where there is no utility, yet nevertheless a demand, perception is everything. But this is not the normal situation, it is the exception.

Typical everyday transactions are based primarily on circumstance and secondly on perception. It is only when dealing in highly speculative assets that perception becomes dominant relative to circumstance, and even then, there are ways to calculate what a reasonable price should be.

By Original uploader was Dmgerman at en.wikipedia - Transfered from en.wikipedia: 2007-09-15 07:35 Dmgerman 600×400×8 (119825 bytes) two pencils grade hb Transfer was stated to be made by User:Ddxc., CC BY 3.0, Link