And this can actually be quantified scientifically. The "need" of the billionaire lost in the Sahara desert can be cashed out as the opportunity cost of refusing the water. If he refuses the water, he loses his fortune (by dying). If he accepts the water, he gets to keep a part of his fortune and all the money he will make in the future. Keeping a part is better than losing everything including the possibility of making more. Thus he will choose the water, and will, if he is strictly rational, accept any price up to the level of his wealth. That represents the value of the water bottle to him.

So it is with any other good. The value of the good must be cashed out in financial terms for the person in question given his situation. The same good can be worth a lot to someone, and very little to another, depending on their circumstances.

Yeah, and that's what makes prices stable over time also, what you didn't mention. — Posty McPostface

Again, this applies to commodities, not to other goods. Commodities do tend to have the same price for everyone. If I'm dying of thirst in the city and go to the supermarket, I'll buy a water bottle for the same cost as the person who has already drunk 3L in the day. For commodities, market value is equal to real value (for the most part). This isn't necessarily the case for other goods - and the farther away they are from commodity status, the least this is likely to be the case.

If we have a supply shortage of water, prices will go up. But over time they will come back down. What determines the level they climb to, and the level they go back to over time? I'd say the level they go up to is determined by the market. The level they go back down to is the real value (which the market approximates in the long run).

If we have a supply shortage of water, prices will go up. But over time they will come back down. What determines the level they climb to, and the level they go back to over time? I'd say the level they go up to is determined by the market. The level they go back down to is the real value (which the market approximates in the long run). — Agustino

Yeah but your only talking about supply and demand. I really don't get what's the issue. Maybe you would prefer a econometric explanation but I can't help with that.

Really, I think economics is the field most in need of a revolution at the moment. People are stuck in absurd ways of thinking, that literarily don't have much to do with reality anymore. — Agustino

I would enlarge that to other social sciences as well.

I think one underlying fact that fundamentally makes social sciences different is that the object of study, how humans behave in a society, changes also. How we think not only of the economy, but also about the society has clearly changed during the centuries.

Yeah but your only talking about supply and demand. I really don't get what's the issue. Maybe you would prefer a econometric explanation but I can't help with that. — Posty McPostface

The issue is that for non-commodities real value is often not the same as market value. So how can we scientifically calculate this real value? For example, someone is saying that XYZ stock is undervalued. To say it's undervalued means that the market price isn't the same as the real price, and the real price is actually greater. In the long run, the market will approximate the real price. So you ought to buy the stock. Right?

So for every asset out there, we must be able to distinguish between market value and real value - we must be able to determine what something should be worth, given a particular situation, not only what it is worth.

Umm, service goods or products offered obey the same relationship a commodity good does based on supply and demand. There should be no confusion with that.

My personal belief is that people have not only wants but needs. So, some commodities have, in my opinion, an inherent worth.

But that's irrelevant because again it's all about supply and demand. Value doesn't come before that and then bargained in the marketplace.

I would agree with that.

The whole efforts of sales and marketing are (1) to make sure the goods that are sold are as far away as they can be from commodity status, and (2) the market can be segmented as much as possible (hence multiple offers at different price points). The opposite of a commodity good is a unique good. So we're trying to sell, as much as possible, unique goods. To give an example:

I was discussing with ssu the act of selling poems. When I start a poem selling business, I don't have a price. I need to determine one. I can look at an average price poems sell at on the market. Let's say this is $5. But now I want to move away from that price. So how do I do that? I need to clarify what needs my poems can meet, and attempt to quantify the value of those needs. That means I need to narrow down on my ideal customer - who would buy those poems.

So why might you buy a poem? Let's see, you want to give a special gift for your significant other, not some cheap sleazy common good that everyone gives them when asking them out. You want something personal that will showcase your love for them. You want it to be unique, effective, beautiful, and get the job done - ie get them to be impressed and say yes.

So now suddenly I'm selling personalised poetry that helps you get the girl of your dreams (expecting most of my customers to be men). How much is that worth? Well, who do I want to sell to? If I want to sell to millionaires it's going to be worth something different than if I want to sell to average people. If I sell average, I will look at the average wages of my market. Say that number is $4,000/month. So I will put my price at 10% of that. So $400/poem. So that will be one offer.

But I'll also have a super-premium offer, poems written by some of the best published poets in the world, combining psychological persuasion techniques with effective and sensual words. Get the girl of your dreams, or 100% money back guaranteed. There we go. How much is that worth? Well, say my intended audience is people who make $20,000/month or more. So I set my price at $2,000/poem.

The above is to illustrate how prices would be set. Of course, after those initial prices, you'd need to test them, and see how the market reacts. Meaning you send highly targeted advertising and marketing to whoever the ideal customer is, and see what kind of results it gets. You test $2,000 for the premium, $1,500, etc. and see whichever gets better (and more profitable) responses. Then you stabilise the price. But quite likely, those first prices will work - they may not be absolutely optimal, but they will get decent results, because they were built up based on some relatively simple (not in a bad way) and firm reasoning - that a man is willing to spend 10% of his monthly income to get a gift that could secure the girl of his dreams saying yes to his request to go out with her.

Umm, service goods or products offered obey the same relationship a commodity good does based on supply and demand. There should be no confusion with that. — Posty McPostface

So why is it possible to sell one website for $200 to a client, and another for $10,000, even though the same work goes in both, and they are essentially the same good? Why the price difference? The market doesn't have a single equilibrium or what?

So why is it possible to sell one website for $200 to a client, and another for $10,000, even though the same work goes in both, and they are essentially the same good? Why the price difference? The market doesn't have a single equilibrium or what? — Agustino

Depends on many factors. How much you customer is willing to pay above market price and why would they do that, how your product or in this case service differs from the rest of the competition, reputation, etc. Too many to list but you get the idea, no?

Depends on many factors. How much you customer is willing to pay above market price and why would they do that, how your product or in this case service differs from the rest of the competition, reputation, etc. Too many to list but you get the idea, no? — Posty McPostface

And what determines what the customer is willing to pay?

What matters is the value of the website to them - what results they can get with it. That's what determines the cost of the website for them, and what they're willing to pay. If the website will get them $1,000,000 in sales (through a single client for example), clearly they're going to pay a lot more than if it will get them just $10,000.

And what determines what the customer is willing to pay? — Agustino

Supply and demand. If your the only guy in town then you can charge what a monopoly charges for their goods and or services. If your code is impeccable and reliability is a concern and that's what you do best, then you can charge more over what others have to offer. It's not that complicated, qualitative wise, quantification of wants and needs is another matter.

So my reputation, portfolio, past clients, testimonials, etc. etc. is only relevant in giving them the confidence that the website I design and develop can bring them results. But the value of the website to them is determined by their business model more than by the previously mentioned factors.

Supply and demand. — Posty McPostface

It can't be supply and demand when the same good gets sold at about the same time to two different clients at wildly different price points. Supply and demand gives only one equilibrium.

In the case you seem to be describing is a service that has an equlibrium set not by the market but by individuals. That would be a contradiction in terms, no?

No, in the case I'm describing there isn't one equilibrium point at all, but rather multiple equilibrium points, all along the demand curve. So some person is willing and able to pay $10,000 for a website since the website is worth more to him (because of his business model and what he is selling) than someone else who is only willing to pay $200.

So draw a demand curve. At Q = 10 you have P = $10,000 and at Q = 50,000 you have P = $200. That means that 10 people are willing (and able) to pay $10,000 for the website, and 49,990 are willing and able to pay less than $10,000.

The idea is that if you could segment the market such that you can charge every person what they're willing to pay, then you'd be able to get the whole area under the demand curve as Revenues, instead of just the rectangle Peq * Qeq (well almost, to be mathematically correct, you'd be able to get all the area under the demand curve that emerges when you integrate with a step size dx = 1).

And the more your good is unique, the more you're able to do this.

Yeah, and a guy who throws a ball for a living can make more than a brain surgeon. That's just how preferences work.

But, you seem to have a very special product or service if you can charge 10000 to one company or individual and at the same time charge 1000 to another company or individual. I'm afraid we're in the twilight zone if this is taking place continuously in the market with other competitors. Either that or you're some benevolent monopoly for the type of product or service you offer.

But, you seem to have a very special product or service if you can charge 10000 to one company or individual and at the same time charge 1000 to another company or individual. I'm afraid we're in the twilight zone — Posty McPostface

Yeah that's what I meant to tell you. So this is another way in which some markets can operate, with transactions happening all over the actual demand curve. If the products sold are unique and there exists high differentiation amongst the participants along with the possibility of market segmentation this can end up happening. Market segmentation is possible because, for example, one of your clients does not know how much you charge the other.

Clearly the supermarket cannot do this, because they can't price discriminate (it's illegal, since their goods are commodities). But if you sell unique goods, oh well, then you're basically always price discriminating.

It can't be supply and demand when the same good gets sold at about the same time to two different clients at wildly different price points. — Agustino

None of your examples seem to be the same product, the poem you sell to the rich is a 'better' poem, the website for the rich firm is a 'better' website, in a free competitive market, how would you propose to out compete your competitors who can set a lower price than you're doing?

And setting up multiple slightly different offers (the extra premium seats which cost $100,000 at football matches and the regular $10 seats) basically lets any producer or service provider to price discriminate.

website for the rich firm is a 'better' website — Inter Alia

Why is it better? It's as good technically and in all other ways as the other one. The only difference is that they will be advertising to different groups of people. And of course they'll have different designs, since, well, they are different websites. And possibly slightly different functionality too.

the point is if it isn't better that the coffee shop version at £5 (English keyboard so I've changed your prices), then what's to stop your competitors from pricing their website to the oil tank firm at £5? What firm would pay you £100 rather than pay your competitors £5,youd very soon be out of business, surely?

the point is if it isn't better that the coffee shop version at £5 (English keyboard so I've changed your prices), then what's to stop your competitors from pricing their website to the oil tank firm at £5? What firm would pay you £100 rather than pay your competitors £5,youd very soon be out of business, surely? — Inter Alia

Psychologically speaking, if my company is selling $1,000,000/product through that website, I will want that website to be good. I'm not a web developer or a web expert though. But I will be okay paying what is still relatively little to me in order to ensure that it's as good as it can be. Paying $200 for it would be disgusting - I will feel like I'm getting a bad deal, and would much rather have the certainty of paying more to ensure good work. Relatively low prices are always associated with bad quality.

Again, you're talking about 'good' and 'bad' quality work now, not the same product, one good and the other bad, the good one is in high demand, but low supply so it commands a higher price. Another way of putting it would be to use your billionaire in the desert example. You can only do what you say if you have a monopoly or market fixing agreement. If there was another water salesman in the same desert he'd get the billionaire's money by charging less than you. You'd then respond by offering less than him, this would carry on until the supply value of the water was reached (which no one would charges less than otherwise they'd make a loss).

So take it like this. I receive 5 offers:
website for $200
website for $1000
website for $2000
website for $5000
website for $10000

I don't even bother looking at the first one, because it seems too low, I will say that's low quality work - I automatically make that assumption. I will associate the 10K one either with a rip off, or with premium quality. So I will look into it. If I can easily afford all of them, just on a psychological basis, I will choose one of the top 2 by highest price in this case.

Again, you're talking about 'good' and 'bad' quality work now — Inter Alia

The "good" and "bad" are psychological associations made based on price. The $200 one may be as good as the $10,000 one in reality.

You can only do what you say if you have a monopoly or market fixing agreement. If there was another water salesman in the same desert he'd get the billionaire's money by charging less than you. You'd then respond by offering less than him, this would carry on until the supply value of the water was reached (which no one would charges less than otherwise they'd make a loss). — Inter Alia

No, I'd just agree to charge his whole wealth and split it with the other water salesman. Why fight, when we can cooperate and make the most?

Paying $200 for it would be disgusting - I will feel like I'm getting a bad deal, and would much rather have the certainty of paying more to ensure good work. — Agustino

That 'feeling' can only be established relative to a competitors product.

That 'feeling' can only be established relative to a competitors product. — Posty McPostface

Yes and no. It's also relative to what you perceive your own worth to be.

Actually, it would be in your both interest to collude being the only two guys with the water, unless you two were like mortal enemies or something like that.

Warranted the person is an idiot.

Take luxury clothing. If I'm a millionaire and someone wants to sell me a $10 dollar shirt, I won't even bother. But if they start talking of some unique $1000 shirt, I might start listening and inquiring more - I'd be asking myself, how can a shirt be worth so much? Maybe there really is something to it, etc. In other words, it would catch my attention, which is half the sales game.

Warranted the person is an idiot. — Posty McPostface

He doesn't have to, it's just basic psychology.

He doesn't have to, it's just basic psychology. — Agustino

Yeah, rational agents aren't all that rational. Too bad, or good, depending on whether you're a consumer or producer.

Yeah, rational agents aren't all that rational. Too bad, or good, depending on whether your a consumer or producer. — Posty McPostface

>:O