[4] Ideal prices, expressed in money-units, can be "estimated", "theorized" or "imputed" for accounting, trading, marketing or calculation purposes, for example using the law of averages.
Such price information is essential to estimate the possible incomes, budgetary implications or costs associated with a transaction.
The distinction is currently best known in the professions of auditing,[5] econometrics and banking, which calculate and apply many different kinds of prices, to value labour, products and assets.
[8] In chapter 3 of the first volume of Das Kapital, Marx states: Every trader knows, that he is far from having turned his goods into money, when he has expressed their value in a price or in imaginary money, and that it does not require the least bit of real gold, to estimate in that metal millions of pounds' worth of goods.
This is no defect, but, on the contrary, admirably adapts the price-form to a mode of production whose inherent laws impose themselves only as the mean of apparently lawless irregularities that compensate one another.
The creation of price information is a production process – its output is worth money, because it is vital for the purpose of trade, and without it the circulation of goods and services could not occur.
Simon Clarke explains for example: The marginalists were no more concerned with the determination of the actual prices that ruled on the market than were the classical economists.
The solutions that were reached would then serve as the basis of policy prescriptions about the proper role of state intervention in the formation of prices in order to achieve such an allocation.
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.
For example, an asset or product may be valued by accountants and statisticians at: A price can be computed for each of these valuations, depending on the purpose.
In turn, that means that the concept of price then stands for any kind of commercial valuation we care to make.
A Latin expression from Roman times is caveat emptor which means "let the buyer beware" (for example, when buying a used vehicle).
[19] In contract law, a "caveat emptor" clause is a disclaimer which stipulates that sellers cannot be held responsible for what buyers do not know about their purchase, i.e. it is accepted that there exists information asymmetry to some or other degree (the purchase may - or may not - include a warranty or legal guarantee[20] which, under specified conditions, gives the buyer his money back).
- that is, one needs to examine the intended purchase carefully, and identify/weigh what buyers and sellers stand to gain from the deal (what their own interest is).
Purely theoretical prices used for analytical purposes, estimation or calculating alternative scenario's may have no correlate in the real world.
Consequently, such knowledge is often kept confidential or is a business secret (see also information security and sociological aspects of secrecy).
In aggregating them, a judgement is made about the meaning of the transactions involved, and boundaries are defined for where they begin and end.
Consequently, in calculating price quantities, valuation principles of some sort is usually applied, regardless of whether this is made explicit or not.
This issue is well known to official statisticians and economic historians, because they face the problem that the very objects whose price movements they aim to track change qualitatively across time, which may necessitate adjustments of the classification systems used to provide standard measures.
Necessarily the central planners had to engage in price accounting, and had to use price information, but the volume and complexity of transactions was so great, that genuine central planning of the economy was often not really feasible in practice; often the state authority could only enforce the conditions of access to resources with the aid of extensive policing.
Market economies often suffer from similar defects, in the sense that commercial price information is in practice deficient, false, distorted or inaccurate.
This is not necessarily because trading parties intend to deceive - generally speaking, deception is bad for business reputations, at least in the long run[28] - but simply because it is technically impossible to provide fully exact price information.
Business price signals are not intrinsically always clear; they can be deceptive, understating or overstating the real situation, or present a completely false picture of transactions and values.
Risk-pricing is intrinsically a problem-fraught process, in so far as it relies on assumptions about unknowns, in advance of actual events.
Commenting on the information problems associated with prices, Randall S. Kroszner, a Governor of the Federal Reserve Bank of the United States, theorizes: When a product's track record is not well established, there should be a strong market demand for information in order to facilitate price discovery.
In order for this process to work most effectively, market participants must utilize information relevant to value that product.
Just before the financial crisis of 2007–08, the Wall Street Journal reported that "Today, 'way less than half' of all securities trade on exchanges with readily available price information, according to Goldman Sachs Group Inc. analyst Daniel Harris.
As a result, money managers can no longer gauge with certainty the value of some assets in mutual funds, hedge funds and other investment vehicles..."[32] The reassurance of a self-balancing market does not matter much when people are making money, but when they do not, they become very concerned with market imbalances (mismatch of supply and demand).
This combination of knowledge and lack thereof contributes to making issues of risk complicated from an epistemological point of view.
Price information is likely to be reliable, But additionally, any market cannot function unless participants show trust and cooperation, and are motivated to do so.