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Saturday, February 27, 2010

What is your understanding of the term 'fair price'? Do you think it is the same or rather does it have the same meaning between the era of pre-indutrial and post-industrial?

The ‘fair price’ is the unbiased estimate of price of goods and services given any constraints in production, distribution, opportunity costs, risk and return. It will be achieved when demand and supply at point of equilibrium.

As of two eras mentioned above, the ‘fair price’ would be relatively different between each other. In pre-industrial era, the economy activities were run on barter trade activities. There were no medium of exchange with monetary values for buy and sell. If party A wanted to sell a cow so he get 10 flocks of chickens whilst party B wanted a cow in exchange of 10 flocks of chicken, they eventually will be trading with each other and exchanging livestock to satisfy their needs. Thus, during this era, the ‘fair price’ is very relative subject. One can argue that the exchanged will be in context of ‘fair price’ because it satisfy the needs of both parties.

As in modern era, the economy activities have developed with money acted as a medium of exchange. Thus, it can be said that the barter trade activities is non-existence no more. The price of goods and services will be priced at uniformly standard monetary value. However, the price of the products will be valued by the invisible hand intervening the market to get the equilibrium point between demand and supply of the goods or services. With regards to the Laissez-faire concepts or free economy, the invisible hand will continue to determine the ‘just price or fair price’ in the market given any constraints in the market environment or the system itself. Thus, the constraints such as constraints in production, distribution, opportunity costs, risk and return will effect the ‘fair price’. For example, if the demand for the product is moderate whilst it is in short supply, the price of product will rise sharp. However, when there is substitute for the product, the price will go the lower level again, until it reach the equilibrium.

In conclusion, the ‘fair price’ in both eras are totally different to one another. This is because the ‘fair price’ in traditional era is depend on how one perceived of his goods or services before exchange it to the other party whereas in modern era, it is determined by the demand and supply of the products or services.

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