A Pricing Model

Prices convey a significant amount of important information about markets. Limited models can prove useful in demonstrating theories about market pricing.

The Difference Between
Direct Prices and Money Prices

People frequently don't know, or forget, that exchanges using money amount, in the final analysis, to goods for goods exchanges—using money as a medium for making the exchanges indirectly. As a result they also ignore the fact that money prices reflect the direct exchange rate (price) of those goods.

When people make exchanges based on their individual subjective preferences the create an objective indicator of those relative preferences in the form of prices — the ratio of what is given relative to what is received. Those objective prices provide a way for economic actors to make calculations regarding the allocation of resources.

The pricing model on the following pages demonstrates the interactive relationships involved in pricing—direct prices and money prices.

Move to the Introduction of the Pricing Model