Have you ever wondered what manufacturers of goods are guided by setting prices for them? It is clear that they take into account the cost of products of their competitors, but competitors must be guided by something. We can say that their pricing policy depends on the reaction of consumers. Well, what does the decision of the buyer depend on?
Labor Cost Theory
The first who tried to explain what the value of certain goods depends on was none other than Adam Smith. He said that it was not silver and gold that all the riches of the world were originally acquired, but only labor. It is very difficult to disagree with this. The labor theory of value was further developed in the writings of V. Petty, D. Ricardo and, of course, K. Marx.
These economists believed that the value of any product created for market exchange depended on the labor expended for its manufacture. This is precisely what determines exchange proportions. At the same time, labor itself may be different. Not requiring qualifications and, conversely, requiring. Since the latter requires preliminary training, certain knowledge and skills, it is valued somewhat higher. This means that one hour of specialist labor can be equated to several hours of simple laborer. So, the labor theory of value suggests that the price of goods is ultimately determined by the socially necessary (average) cost of time. Is this explanation exhaustive? It turns out that no!
Marginal utility theory
Imagine that you spent some time in the desert, and your life depends on several sips of life-giving moisture. At the same time, you have a million dollars in cash with you. For this price, a merchant who comes across offers to buy a jug of clean cold water from him. Do you agree to make such an exchange? The answer is obvious. The unearned theory of value, founded by O. Boehm-Bawerk, F. Wieser, and K. Menger, says that the value of goods and services is determined not by labor costs, but by the economic psychology of the consumer, the buyer of useful things. If you think about it, this statement contains a certain amount of truth. Indeed, a person evaluates a certain good depending on his life circumstances. Moreover, the subjective value of the same product as it acquires decreases.
For example, in the heat we will gladly buy ice cream for ourselves, having eaten it, we may want to get a second and even a third. But the fourth, fifth and sixth will no longer have for us such value as the first. The labor theory of value cannot explain such behavior, and the theory of utility can easily cope with this.
The theory of supply and demand (neoclassical school)
Representatives of this direction, founded by the prominent economist A. Marshall, saw in the previous explanations of the value of one-sidedness and decided to combine the two previously described approaches. In their theory of the value of goods, there is a clear departure from attempts to find a single source of product prices. From the point of view of A. Marshall, a discussion of whether the cost is regulated - by costs or utility - is equivalent to a debate about which blade (top or bottom) scissors cut a sheet of paper. Neoclassicists believe that the value of goods is determined through the relationship of the buyer and seller. Therefore, they are in the first place factors of supply and demand. In other words, the value of the value depends on the ratio of the costs of the producer (sellers) and the income of the consumer (buyer). This ratio is equal, and each side evaluates this value in its own way, taking into account the maximum possible concessions to each other.