Price Searching

Price Searching in the Lived World People often claim that sellers set prices for what they sell wherever they want to. Retail sellers will claim that they set their prices based on the ‘cost plus a markup’ plan. And producers claim that they only produce what they can sell. According to the economic way of thinking, their explanations are not enough as the cost-plus-markup procedure is only a rule of thumb in general for price searchers. The economic way of thinking explains that producers are price searchers. Producers search for prices that will maximize their profits. If producers offer a lower price for a certain product, they will sell more of it, other things being constant. And if they offer a higher price for it, they will sell less of it. Producers also do not want to produce any more or any less than they can sell for a certain period. How much they can sell for a certain period of time generally depends on the price they offer. While they may be able to ‘set’ their prices for a low amount, they cannot sell at that price over a long period unless it does not cover all their cost of production. As explained by Professor Kendall in ‘My Thoughts’, their cost of production include payments to the owners of the land, the labor and the capital required to produce. As explained in the textbook, the price searcher’s task can be very complex and uncertain. In the lived world as opposed to the theories that we devise, producers have to learn through trial and error whether they produce a material good or offer a service. They have to decide based on their experience what quantity to produce per unit of time and what price to charge for what they sell. Suppliers make their plans, execute those plans, and adjust accordingly on what happened. In the lived world, buyers compete with other buyers and sellers compete with other sellers. And that competition also has an impact on the price of a product. In theory, sellers can sell their products at any price they want. But in order to maximize their profit and avoid incurring any losses, sellers have to raise or lower their prices based on competition as well. As explained in the textbook, price searchers find the prices they look for by estimating the marginal cost and marginal revenue, ‘determining the level of output that will enable them to sell all those units of output, and only those units for which marginal revenue is greater than marginal cost’, and setting their prices accordingly so they can sell just the output they produced.