Why would math be the beginning of any discussion of prices? Because prices are ratios with a currency usually being the numerator while a product or service is the denominator. For example, I recently bought some meat for $1.99/pound. For one pound of meat, I paid $1.99. And this occurred multiple times as I made my way through the grocery store aisles.
Prices reflect an exchange agreement at some point in time. Underlying this simple measurement lies a host of actions by multiple actors trying to move the price in their favor. Marketing is no more than strategies and activities to increase the demand for a specified product or service. This is extremely important because all revenue is generated by demand. On the other side of the equation (profit = revenue – costs) is supply where producers are trying to make the highest quality product at the lowest possible cost (which is also a price). The entire discipline of management focuses on this efficient ratio (cost).
Understanding prices and the underlying principles that guide their determination is one of the most important economic lessons any of us can learn. But sometimes the obvious is not so apparent. Prices rise and prices fall over time. And an individual is bound by time and must make purchasing and production decisions within time constraints. What if you loosen your time constraint by delaying a purchase or sale? Farmers regularly delay selling at harvest (a period of low prices) by storing their product to receive higher prices (greater than the cost of storage) at a later date. Consumers do the same when they take advantage of “sale” prices and buy large quantities at the lower price. So being a short-term seller usually results in a less advantageous price for the seller than if they were a long-term seller. Likewise, being a short-term buyer usually results in paying a higher price. Many examples exist that exemplify this reality. Any person who owns a car knows that waiting until your car is inoperative to repair it is looking at increased costs (towing plus increased repairs.) Other examples reflect this time dimension of matching long/short term buyers and sellers. The most advantageous situation occurs when a long-term and short-term actor trade with the price most always tilting in the long-term’s favor.
The lesson here is to be aware of your situation and, if possible be a long-term buyer and seller. Understanding markets and the resulting prices can lead to decisions that increase wealth and economic prosperity. On the other hand, poverty awaits those who continually find themselves in short term trading situations.
Steve Turner is a professor of Agricultural Economics at Mississippi State University.