What is a price and how does it appear?

There is a sign on the door of the bread shop: "Bread: 4 000 soum". You see this number every day. But why did the baker write exactly this amount? Why not 2 000 or 10 000? In this lesson we look inside the price.

What is a price?

A price is the amount of money you give to get one thing. "Bread is 4 000 soum" means: to get this loaf, you give 4 000 soum.

The price links the seller and the buyer. For the seller it answers the question "how much will I get". For the buyer it answers "how much will I pay".

How does the baker work out the price?

First the baker calculates how much one loaf costs him. For example (the figures are hypothetical), the costs per loaf are:

So one loaf costs the baker 3 500 soum. This amount is called cost, that is, "how much the thing cost the maker".

If the baker sells the bread for 3 500 soum, he earns nothing from his work. So he adds a little on top of the cost and asks 4 000 soum. From each loaf he keeps 4 000 − 3 500 = 500 soum.

What does the buyer say?

The seller alone does not set the price. If the baker asks 8 000 soum for a loaf, buyers go to the baker next door or bake bread at home. The baker's bread is not sold and goes stale.

So the price sits between two limits:

• the lower limit: how much the thing costs the seller (if he sells cheaper, he makes a loss);
• the upper limit: how much the buyer is willing to pay (if it is more expensive, he does not buy).

Why do prices change?

In summer there are a lot of tomatoes at the market, because every farmer brings them. There are many sellers, but the number of buyers is the same as before. Each seller lowers his price so that he can sell all his tomatoes in time.

In winter tomatoes can only be grown in greenhouses, and few people bring them. When many people want something but there is little of it, the price goes up.

The simple rule is this: when there is little of a thing and many people want it, the price goes up; when there is a lot of it and few people want it, the price goes down. Economists call how much buyers are ready to buy "demand", and how much sellers are ready to sell "supply". You can read about these words in our glossary.

How do you compare prices?

At the market the same thing is sold in different sizes. For example (the figures are hypothetical), at one stall potatoes cost 5 000 soum per kilo, and at another a 3 kg bag costs 13 500 soum.

Which is cheaper? We divide the price of the bag by the kilograms: 13 500 ÷ 3 = 4 500 soum. So buying the bag is 500 soum cheaper per kilo. But if you need only one kilo, buying extra is no use. When you compare prices, always calculate for "one piece" or "one kilo".

In the next lesson

In the fourth Basics lesson we will split the things sold at the market into two groups: goods and services, what is the difference.