2
$\begingroup$

Is the market price objective, does it exist independently of human consciousness, how do we treat the market price in economics and the philosophy of economics?

The market price is the current price at which an asset or service can be bought or sold.

If it is lower than the owner's indifference price the asset or service wouldn't be sold. If it is higher than everyone's indifference price the asset or service wouldn't be bought. If it was shared by all individuals transactions wouldn't occur (there is no loss-seeking). If it was material a change in expectations or other purely subjective information (a car's first sale was exhausted) would not change the market price.

That leads me to think that the market price is subjective (or at least intersubjective insofar as 2 parties agree on it) and deeply connected to the personal preferences and the utility these persons hold for the asset.

The government (and most economically illiterate people) usually treat the market price as objective and ofter confound it with the price (the number) that a label writes on it often ignoring that the owner is not the seller (someone sells at price X but I am not so that must say something about the market price of the asset I own) and that nobody may be willing to buy at that "market price". The government says the market price is X and I can't find anyone to sell it for X (not even the government is willing to buy at X).

$\endgroup$
1
  • $\begingroup$ Comments are not for extended discussion; this conversation has been moved to chat. $\endgroup$
    – 1muflon1
    Jan 22 at 14:14

4 Answers 4

13
$\begingroup$

The market price is the current price at which something may be bought or sold. If a good is not sold or bought at a particular price, then that is not the market price. Whether or not any particular individual thinks that price is too high or too low makes no difference, as the market price is by definition the price that someone is willing to pay/receive for an item.

Suppose the market price for widgets is $100. That means there is someone selling widgets for as little as \$100, and someone willing to buy widgets for as much as \$100. At a price of \$100, people are actually trading widgets for cash. There is no subjective interpretation of the market price, my personal opinion on the value of widgets does not change the fact that the market price is \$100. I might not buy a widget until it costs only \$90, but that doesn't change the fact that widget manufacturers can sell widgets for \$100. A widget manufacturer might think their widgets are worth \$110, but they won't sell any when other manufacturers are selling identical widgets for \$100.

A market price can go up or down depending on subjective sentiment about what something is truly worth, but there is no subjectivity about what the market price is - it is whatever people are paying. Market price is inherently an aggregate measure that doesn't measure preferences of individual consumers - it doesn't really make sense to discuss market price in a scenario where two particular individuals need to agree on a price. In a market of many individuals, so long as some pair of buyer and seller agree on the price, that is the market price.

Now, if all buyers collectively agree that their subjective utility gain from an item is not worth the current market price, then no one will buy, and the market price must fall (since widgets can no longer be sold for $100). But as soon as we reach an equilibrium price where widgets are bought and sold again, there will be a new market price.

TL;DR: The market price is an objective measure that reflects the most recent price at which goods are traded. What that market price is depends on aggregate, subjective beliefs about how much the goods are worth. The market price is unrelated to your personal opinion about whether that good is over/underpriced, but it is related to aggregate subjective beliefs of the market as a whole - if everyone thinks a good is overpriced, the market price must shift.

$\endgroup$
15
  • 1
    $\begingroup$ We are assuming homogeneity (identical widgets) when it is not given. We are speaking of gadget A owned by B and he is simply not selling at the supposed market price. You didn't answer the question. You unilateraly assumed the most beneficial scenerio when I will not buy for less than the market price. Consider the situation when noone buys at the market price or when the asset is not sold at that price (a unique asset). $\endgroup$ Jan 18 at 21:38
  • 12
    $\begingroup$ @GeorgeNtoulos If no one is willing to buy or sell at the current market price, then the market price must move, or else there is no market at all. If widget buyers will only buy for \$90 and widget sellers will only sell for \$110, there is no market for widgets, as no one can find an acceptable trade partner. Agree things get tricky for unique assets, as the utility of market price relies on it being widely applicable. For unique assets, a single person buying an item may not suggest anyone else would, but it's a reasonable stance for a commodity. $\endgroup$ Jan 18 at 21:56
  • 2
    $\begingroup$ @NuclearHoagie LIBOR used to be the market price of money and a large number of real transactions used it (typically at LIBOR plus an agreed margin) but, as a number of people at the Bank of England said in 2008, it was "the rate at which banks don't lend to each other". $\endgroup$
    – Henry
    Jan 20 at 12:48
  • 2
    $\begingroup$ @GeorgeNtoulos if you are not willing to sell your house for X, then X is no longer price at which your house can be bought and sold. If something can be bought and sold that is objective, you seriously think thank when you pay your rent (say your rent is \$1000) that number is subjective number? If that would be the case how would anyone ever calculate VAT? How would accounting work? You can't be serious! $\endgroup$
    – WilliamT
    Jan 20 at 23:06
  • 2
    $\begingroup$ @GeorgeNtoulos Btw, this is the problem I highlighted in my answer. You are confusing value orwillingness to buy (which is subjective), and market price (objective). Generally market price $\neq$ value or willingness to pay (they might be equal in some cases but not generally). You are just confusing these 3 different terms. Market price does not need to be equal to your private valuation. Your private valuation and willingness to buy are fully subjective. Market price is fully objective and exist irrespective how much value you happen to put on something. $\endgroup$
    – 1muflon1
    Jan 21 at 1:22
9
$\begingroup$

The vast majority of economists subscribe today to the subjective theory of value that was in economics introduced by Jevons, Walras, and Menger. Subjective theory of value posits that value is subjective. A corollary to that is that there is no correct objective price.

However, if you talk about market price existing as an objective number that is different matter. A market price is defined as:

The last traded price or current good quotes by market-makers.

You can actually record market price in a way that everyone objectively agrees on it. Using the definition above I could check my local grocery store and record that the current market price of 2l milk is let's say 1.5 euro. Nobody can claim that that is the 'correct' or intrinsic price of milk, different people might have different valuation, but everyone, or at least every economist, can agree that is the 'current quote by market-maker' and thus that it is a market price.

The government (and most economically illiterate people) usually treat the market price as objective and ofter confound it with the price (the number) that a laber writes on it often ignoring that the owner is not the seller (someone sells at price X but I am not so that must say something about the market price of the asset I own)

No it seems that you confuse the concept of the 'right/correct/just/intrinsic price' which is inherently subjective with market price which is just last observable price at which someone transacted some item. Market price tells you only the lower boundary for valuation of buyer and upper boundary for valuation of seller, the valuation itself is subjective, but one can objectively record the market price at which transaction took place.

It is also government's prerogative to establish price controls. Government can declare that certain markets are subject to price floors or celling if they wish so. Or even set the prices outright like was done in USSR. A consensus among economists is that in most, but not all, markets pursuing price controls is bad policy that lowers economic welfare (see Mankiw Principles of Economics 5th ed pp 35 and pp 114-123), but still any sovereign government has ultimately the prerogative to set the price on any market as they wish regardless of whether you can sell something at that price or not.

Illustration

To further illustrate the difference between value/willingness to buy (which is subjective) and market price (which is objective) I am also including the following diagram that hopefully explain it:

Willingness to Pay/Value: buyer’s maximum is called his willingness to pay, and it measures how much that buyer values the good. (Mankiw Principles of Economics pp 139).

Market Price: The last traded price or current good quotes by market-makers.

This can be clearly visualized using demand-supply graph below: enter image description here

The graph above visualizes willingness to pay for someone who is valuing the good more than market price (red), someone who is valuing the good for less than market price (green), these are not directly observable and they are based on people's values.

The market price (blue price) is price at which actually transaction happen in the market. Market price does not need to be equal to your personal subjective valuation (maybe your personal demand would be part of the total market demand somewhere below the market price as the green example in the picture above).

Why is market price objective? Because market price is factual and verifiable. For example, current market price of milk in Albert Hein online grocery market on 22/1/2021 is €1.75.

Anybody looking at the image below can see the price €1.75. Anyone can objectively verify that. It does not matter that you are not willing to pay €1.75. Your willingness to pay is subjective, but the market price of €1.75 is objective regardless whether you think that 2l milk has value of €10 or €0.5 (this is not directly observable and this valuation is only in your head). Bottom line, your personal valuation is not necessary the market price.

Anyone can agree that there is €1.75 at the picture. Unless you go as far as to deny existence of objective reality independent of humans that is.

enter image description here

Edit:

Since there was some confusion about this, the above applies to both homogenous goods and heterogenous goods. Market prices for both are fully objective.

Here is example of heterogenous good, a unique painting selling for €770. Everyone can objectively agree that €770 is listed on the picture below. It is objective and empirically verifiable fact that the painting can be bought for €770. You might disagree with that price because your subjective valuation is different from market price, but the market price €770 is objective fact.

enter image description here

$\endgroup$
34
  • $\begingroup$ I am not sure I understood what you said is the market price (I would also like a reference on that regarding what is a market price). Is the market price the same as the agreed exchange rate for a single transaction (considering that all goods are unique). If that is so I would like references on that and I want to understand why that is objective (maybe it would be deep on the philosophy of economics) i.e why the single agreement (the single particular price agreed) exists independently of human consciousness. $\endgroup$ Jan 20 at 20:33
  • $\begingroup$ @GeorgeNtoulos 1. I already provided reference just click on the link in my text. 2. As explained by definition of the word market price, market price is both “the last traded price” or “current quotes by market-makers”. 3. It is false that all goods are unique. Trivially you can have 2 liters of water separate them into two containers and there is literally no scientific way of distinguishing the two. Some goods can be homogenous that is simply fact. Next in economics goods would be considered homogeneous even if there are some trivial differences like carton of milk that might have 1l of $\endgroup$
    – 1muflon1
    Jan 20 at 20:40
  • $\begingroup$ Milk +- 0.001ml. 4. Market price constantly fluctuates and changes. Market price one second might be different than market price in previous second. 5. Markets can be very narrow cafeteria might be completely separate market with separate market price for bread from store just outside the school. 6. It is objective because objective is simply by definition something that represents fact. For example, earth rotates every 24 hour is objective fact $\endgroup$
    – 1muflon1
    Jan 20 at 20:44
  • 1
    $\begingroup$ Literally world objective is defined by Oxford dictionary “having actual existence outside mind: a matter of objective fact” see pocket Oxford dictionary pp662. This is also close the definition of objective that we use in science. It is a matter of fact that today I bought at my university campus before giving a lecture a coffee for €2.99. That was the price printed on the menu, you can record it by taking picture of it or putting it in a database and every observer will agree that €2.99 was printed on the menu. So €2.99 printed on menu clearly exists outside everyone mind. There are actually $\endgroup$
    – 1muflon1
    Jan 20 at 20:50
  • $\begingroup$ Molecules of ink on molecules of paper. Unless you want to subscribe to extreme radical relativism, the postulates that no objective truth, earth could be flat, Sun might not exist, it’s all just illusion - something that is antithesis to science then the fact that the molecules of ink on molecules of paper existed and were formed in a shape €2.99 by definition made €2.99 market price in that small locally defined market of a university cafe at approximately 15:00 GMT+1. Moreover, my card using electro magnetism did informed my bank to transfer 2.99 from my account and there is recording of it $\endgroup$
    – 1muflon1
    Jan 20 at 20:59
4
$\begingroup$

The other two up-voted answers are both correct but unnecessarily convoluted for such simple quesiton.

Simple answer is that market price is objective. Market price is:

The market price is the current price at which an asset or service can be bought or sold.

This is as objective as measuring a temperature of a room. You confuse market price and value which is subjective.

$\endgroup$
20
  • $\begingroup$ Is the market price the same then with the single transaction price? A and B agreed to trade C (an asset) for D (an amount). Is D the market price for C? If that is so isn't it subjective? Without human consciousness there are no transactions at all. $\endgroup$ Jan 18 at 21:44
  • 2
    $\begingroup$ @GeorgeNtoulos subjective is not human made. I sit in my house. The building is objective. Every person would agree that my house is a building that it has white walls, that my room has 4 windows. History is also not subjective, holocaust did happen, that is an objective fact. A and B in history exchanged $D amount of money. That is objective fact. Even if humans would be erased it would be objective fact that happened at some point in history. $\endgroup$
    – csilvia
    Jan 18 at 21:55
  • 1
    $\begingroup$ @MichaelKay no it isn't. At least not in economics. According to your bio you are programmer so maybe field of programming has some definition of price unrelated to economics. Market price is price at which something sells. Market price does not exist once and for all. If one share of Microsoft stock sells for \$10 at 12:01 then market price of microsoft stock at 12:01 is \$10. If it sells for \$11 at 12:02 that is the new market price. If two identical goods sell for different amount of money the market price is not simply average price that is nonsensical. $\endgroup$
    – csilvia
    Jan 20 at 22:10
  • 2
    $\begingroup$ People sometimes calculate average to aggregate data but that aggregated average would be average market price over some period, not market price. If you have the same commodity as an iron for example, selling at different prices in different location you will have market price for steel in China, Japan, USA and so on. No respected economist would just average different prices and claim that is the market price. $\endgroup$
    – csilvia
    Jan 20 at 22:11
  • 1
    $\begingroup$ @MichaelKay of course it is not... are you even serious right now? you must be joking! That is like asking "so you are telling me that when water bottle says no chemicals, that is not what biology/chemistry considers chemical? Since you may not get it - in biology/chemistry water is a chemical so slogan no chemicals is oxymoron. In that slogan you describe, that would be estimate of what is the most probable market price. Also, that estimate is not really made by "combining" various market prices together. That is nonsense gibberish. The site has some machine learning algorithm that $\endgroup$
    – csilvia
    Jan 21 at 17:33
3
$\begingroup$

I think your talking about three different prices and that's the source of your confusion. They can be defined as:

  • bid price - how much buyer is wanting to pay
  • ask/offer price - for how much seller is wanting to sell
  • market price - price at which those two prices meet and actual transactions happen

Therefore, market price can thought as 'objective price'. Of course this is really simplified picture, as other already wrote in their answers. E.g., there can be too little transactions happening to meaningfully define 'market price' of some unique goods.

$\endgroup$

Not the answer you're looking for? Browse other questions tagged or ask your own question.