Real Prices and Ideal Prices - Actual and Potential Prices

Actual and Potential Prices

When goods are produced for sale, they may be priced, but those prices are initially only potential prices. There may not be any certainty about whether they will all fetch exactly the sum of money stated by those prices when they are actually sold, or whether they will be sold at all. In retrospect, the final value of an output, activity or asset may turn out to have been higher or lower than previously anticipated, because for various reasons prices and demand changed in the meantime. Thus, price negotiations, trading circumstances and the time factor may change actual prices realised from the prices originally set, and if price inflation occurs there is in addition a difference between the nominal prices and the inflation-adjusted price. The price of a stock or a debt security, expressed in a given currency, may be highly variable, and their variable yields may in turn revalue or devalue the prices of related assets.

Thus, the "price mechanism" is often not simply a function of supply and demand for a tradeable object, but of a structure of related and co-existing prices, where fluctuations in one group of prices impact on another group of prices - perhaps quite contrary to the wishes of buyers and sellers. In this sense, the concept of a "price shock" refers to a drastic change in the price of a good which is widely used, and which therefore suddenly changes a whole lot of related prices.

The sale price may be modified also by the difference in time between purchase and payment - for example, someone may opt to buy a product on credit, and pay interest in addition to the asking price for the product; and the interest charge may additionally vary during the interval in which the principal is paid off. Or, the price changes because of price inflation or because it is renegotiated. If it is not possible to pay for something within the previously expected time interval, that may also change prices.

Mike Beggs explains why credit instruments complicate the distinction between actual and ideal prices:

"...the essence of monetary relations is that exchange often is, and has been, mediated by credit relations rather than through the actual circulation of money. This is undeniably true: credit relationships transform exchange so that payments do not coincide with transactions and reciprocal relationships may mean that some debts balance without ever needing to be cleared by monetary payment."

The effect of credit instruments is, that actual payments are removed in space and time from the trade in debt obligations, and indeed the trade in debt can occur without necessarily involving any monetary transactions. In turn, this blurs the distinction between actual money (i.e. hard cash) and ideal money, or between real and ideal prices. In developed economies, cash in circulation normally ranges from 6% to 8% of GDP, but the debts of private banks alone are already a multiple of GDP (in the EU area, about 3.5x the total GDP).