Subjective Value and Market Prices | Jeffrey M. Herbener

good morning in the first two days of mises University The Faculty constructs the foundation of understanding the working of the market economy the foundation of understanding catalactics and in understanding the market economy in understanding all other possible economies and this Foundation is the principle of economic calculation so in this time that we have together now we will lay the Cornerstone of this foundation and the Cornerstone of the foundation of economic calculation is the theory of price we'll proceed in four steps in the first step we will talk about some of the fundamental principles of Human

Action repairing to some of the things that Dr Hoppa discussed last night then from there we'll move on to the concept of valuation and we'll see the valuation is The Logical principle behind the way in which all of us construct what we might call our personal economies how we come to acquire and goods and use them in Acts of production and consumption and having done that we'll introduce the principle of appraisement which is the method by which entrepreneurs in the market economy economize the use of resources and and consumer goods in in a way that's

uh parallel to our own personal economies in the way that we economize within our own personal lives and in doing that we'll we'll talk uh briefly about the concept of economic calculation and then with all that as background we'll talk about the theory of price so to start at the beginning um Human Action is purposeful Behavior that in Human Action the human person is aiming to attain an end or we could say that the human person has the motive of attaining the end we realize though immediately once the concept is in our minds present you

know in the Forefront of our minds of having an end that having an end does not constitute action in order to act we have to first perceive that there are means in the world that can be brought into uh concert and used by US to act and then attempt to realize the the attainment of the end for which we're striving or we could put it this way in any particular instance of action we have unmet ends because our means are scarce right this is just another way of saying that our some of our ends are

unmet now another fundamental principle is that the means that we have available to us in our world are somewhat convertible from one process of production to another so this is obviously true of Labor we can shift our labor activity from producing one thing to producing another and therefore attaining one end as opposed to another and again it's sort of obviously true about land sites they can be used for all sorts of various productive activities right they're somewhat convertible from one thing to another and even capital goods are this way although some of capital goods of

course are not as convertible as others but you can think of things like computers that could be shifted from one kind of production process to another now given all of this it follows that we have to make choices when we engage in action that action is predicated upon choice if our means are scarce we have to make a choice then which ends to pursue if our means are convertible if we can combine them in different ways to act and try to attain an end we have to choose then which combination of means to put together

in order to engage in action to strive to attain our ends now if we combine these facts with the purpose that we mentioned at the beginning we get the fundamental concept of economic analysis which is economizing you could see that the whole language right of Economics comes from this idea that we economize human beings are economizing we strive to attain higher valued ends with the means that we have and we set aside lesser valued ends and for any given end we strive to attain this end with a combination of means that we value less highly

and therefore have more valuable means to attain other ends so we're always constantly engaged in economizing in every action this is a fundamental principle of human action and as Dr Hapa pointed out last night this uh economizing activity requires personal judgment it's only undertaken by each individual person striving to again perceive and acquire and use means that he or she thinks are appropriate to detainment of the ends that they value so this can't be ignored or set aside in doing economic analysis this personal judgment that is the foundation really of economizing of making a choice

between one course of action and another now every choice then involves a comparison of the valuations that a person might make between competing ends or competing sets of means there's always because means are scarce there's always something accepted or chosen in action and something set aside and in order to indicate this verbally economists like to use the word preference so we have a preference for one thing over another we just mean a rank order of one thing being better this end to attain is better that end to attain has set aside right is not preferred

so this is the idea of preference notice the uh Dr hoppagian mentioned all this last night about the Linguistics of of all of this when economists are talking about these concepts of valuing and preferring and so on we have a very technical way in understanding these Concepts very specific way of the logic of action it's all driven by our task of trying to construct a set of concepts by which we can grasp the reality of Human Action and so when we talk about preference we're talking about what Murray rothbard like to call demonstrated preference we're

not talking about wish lists or you know what we would put down on a survey or something of this or we're talking about the choice that we make in action is driven by the valuation comparison in that act of choice between the thing that we prefer and choose and the thing that we we prefer less and set aside so it's the idea again of this fundamental idea again of preference now uh since this topic is called subjective value let's get to the subjectivity of value value has in fact two more important realistic features to it

one is subjectivity and by subjectivity of value what economists are referring to is that value is simply a state of mind value is nothing more than a mental judgment that's made value only exists in the mind of the person who is valuing his or her action and because of this um there isn't any possibility of measuring subjective value that subjective value is not a substance that can be measured there is it doesn't make any sense to talk about this sort of thing but if it can't be measured we can't then make comparisons of the amount

of subjective value especially this is important that we cannot do this interpersonally so we it isn't possible to compare directly the amount of subjective value one person has with the amount of subjective value another person's has because objective value is not an amount of anything it's just a state of mind it's just a mental judgment this is what we mean in economics by the subjectivity of value we'll see the implications of this as we go along second thing to note about valuing that's important as a fundamental principle is it valuation lacks constancy again this is

something Dr Hoppa mentioned last night that each individual person when confronted with certain circumstances in which the person is going to act will in the action will make a mental judgment as to the importance and relevance of these circumstances and how best then to act within the these circumstances given their judgment and this judgment cannot be uh predicted or it isn't determined by the circumstances themselves and so we're just not in a position to be able to formulate um mathematical expressions of uh that are based on subjective valuation as ludovombesis likes to put it in

economics everything is a variable there are no constants either between people or for a given person over time right our subjective judgments our mental judgments are changeable in ways that aren't quantitatively predictable and so that too is an important uh fundamental principle to keep in mind as we start to lay this Cornerstone and build this Foundation of economic calculation and then finally I'll just mention uh again something Dr Hoppa pointed out last night that since uh Human Action requires choice and since choice is just a it was predicated upon a comparison of the value of

the option chosen relative the value of the next best option not chosen there's always a subjective cost or opportunity cost as economists like to say involved in choice and action and it too then has the same character as the value of the option chosen it's just a subjective assessment of the importance of the satisfaction that a person anticipates getting from taking that particular alternative it follows then directly from these considerations that there's also an attempt by a person in action to attain a net benefit to set aside something less valuable and strive to attain something

more valuable and so the very idea of net benefit or profit is a fundamental subjective category of human life now the next step is to see what what is the relationship though between these mental um in uh valuations that we make and the particular consumer goods and producer Goods that we assemble in action to attain these ends and so the top line of this slide gives you the Austrian view of so-called value imputation the middle line gives you the view of the British classical school let's say from David Ricardo in the labor theory of value

and the bottom line gives you the the view from neoclassical economics is given by Alfred Marshall and you can see the different way in which they conceive of the transmission the arrows are arrows of transmission the value where the austrians say it must be the case that since all Human Action aims at attaining an end that the consumer good that a person uses as an aide to attain an end must have its value given to it by the person who's striving to attain the end that the value of the good comes from or is derived

from the value of the end itself and the assessment that the person makes as to the importance of using this particular good in an action to attain the end and if that's true of consumer goods and it must also follow through for producer Goods the only reason a person values a producer good is because he or she anticipates that the application of the producer good in combination with other producer Goods will produce a consumer good and then the consumer Good Will directly Aid in the attainment of the end um the the middle line from the

British classical school turns this transmission process on its head and says producer Goods must have intrinsic value and the intrinsic value of a producer good like the labor theory of value the intrinsic value of Labor is transmitted to the consumer good through the act of production and then that value of the consumer good is assented to by the human mind and all I'm pointing out at this juncture is to say that um to hold this view contradicts the very basic fundamental notion Of Human Action which is that it's purposeful behavior that everything about Human Action

is driven by the motive to attain the end the end is the primary thing and therefore the means must be secondary to the attainment of the end the neoclassical view that turns the arrows in on each other you know this um petition that uh Alfred Marshall that the price of a consumer good is jointly determined by the subjective valuation of the consumers on the demand side and the intrinsic cost of production values on the on the supply side um it surrenders all possibility of engaging in anything like a scientific approach to economic logic right there

it throws out of consideration any sort of teleological approach to economic analysis and instead just says something like everything depends upon everything else right it doesn't really get us anywhere in this regard or as Dr Hoppa pointed out last night it throws one back into this realm of just thinking that the only economic analysis that can be done theoretically is to engage in empirical hypothesis testing is to do empirical work all right so let's take the next step we can say some other things about about uh the value of consumer goods and producer Goods at

the beginning of this uh consideration right and so here on the left hand side of the slide first suppose we have a person who owns an iPhone SE and we asked this question this person obviously we already answered some of the questions that economic logic can tell us about this person owns the iPhone SE they came to acquire it right they purchased it and somehow or it was gifted to them and they kept it or you know however they acquired it and they're using it as a consumer good to satisfy their ends they're choosing to

retain this good and and use it because they find it conducive more conducive than other alternatives to the attainment of the end but the question we want to pursue now is why doesn't a person own another iPhone SE if a person just owns one and it's a good to them why don't they own two and what yeah so we get we get again what Dr Hoppa had mentioned last night we see immediately the law of diminishing marginal utility or what rothbard would call the first law of utility that since the first unit of a good

in this case the iPhone SE is being used for the most valuable purposes that's economizing if a person had another unit of the consumer good that person would have to apply it to less valuable ends and therefore would impute less value to that unit right diminishing marginal utility and it also illustrates this simple preference rank illustrates the other law that Dr Hoppa mentioned which is the law that more units of a good is always preferred to fewer units of a good this of course requires the condition that having an extra unit of a good is

always in the face of scarcity that a person doesn't have so many units of a good that they no longer have ends to which they could put the units of the good if that's true then the law doesn't apply the law is only apply to Goods Goods by definition are scarce as we talked about already okay so that's the that's the first set of laws that we can derive about this on the on the right hand side we have the second principle or law that we can derive about valuation of consumer goods and this is

the idea that uh let's suppose my example is just this let's suppose that this person who owns the iPhone SE engages in this act of consumption which is the person does FaceTime for two hours with his dear mother who you know hasn't heard from him for a week or two and so he wants to spend some time uh you know face time with his mom but remember once he does that then the most valuable use of the consumer good has been exhausted and then any additional Act of of using the consumer good would have less

value to this person the person is always economizing right they're always choosing what they value more highly well if if the if another use of the iPhone SE is less valuable the person might then uh interject a different action that doesn't use this the this particular consumer good uh into the you know into their personal economy right though so this is the explanation that economists would give the logical structure that explains how you and I divide up our acts of consumption during the day right we're doing this act and then that act as we go

you know you go for a run for an hour uh well why do you why why does this person have a pair of uh Hoka Bondi shoes well because the person gets consumptive value from doing running right and the shoes are valued as a as a consumer good means to attain this end and but then once that act was accomplished what would the next use of the shoes be right less valued and so something else comes into consideration now tomorrow I know what you're thinking because you're a bunch of bright students you're thinking doesn't that

imply a certain isn't my example sort of implying a certain chronology of these actions we'll get to that tomorrow we did that first thing tomorrow we'll talk about chronology later all who we're talking about now is logic we're not talking about the chronological structure of action we're just talking about is logic okay all right so that's that's how we think about consumer goods now we can do the same thing remember our value imputation process goes from consumer goods to producer Goods we can do the same thing with producer Goods it's no different we just hit

but there's a certain um Universal logical structure of how this works so here my example is suppose the same person uh lives on you know bought property is his family and he owns property and he bought this property uh because it has a stream that runs through the property and he likes to fish and they're fishing stream and so now his personal economy he's he's acquired this property that has what he wants in terms of that consumer possibility and then he buys a fishing rod and right and a tackle box and he's got all the

complementary factors of production to engage in fishing and now he's just applying labor he's just going out and fishing right and what we find in this sort of situation we think of the logic of this case Every Act of production uses complementary factors of production in this case the natural resource of the stream and capital goods of the fishing pole and The Tackle Box and then labor It's a combination of these things and if it if it's always a combination of things then we can always just as a mental exercise just a logical exercise vary

the amount of one of the factors of production leaving the others fixed in amount we know he's asked the question what would happen if this person just continued to fish 24 hours a day seven days a week they just fished well they would hit eventually then this principle of the law of returns right they would hit diminishing returns for increasing amounts of the variable input used with fixed amounts of the of these complementary inputs and therefore the advantage that they get from these acts of production would diminish progressively right from adding more and more units

of Labor so you can see that we can establish laws in the same way we're talking about our personal economies as we did for consumption if if these acts of personal production are subject to the law of returns that is diminishing returns decreasing returns to additional units of the variable input in this case labor then a person will shift labor away from things that are increasingly less valuable towards things that the person finds more valuable right they'll shift away from phishing because the two extra fish from the second unit of Labor and fishing isn't as

important as uh as half of the doghouse and so they're the person right is just making a dog house with labor he bought the labor you know the materials and has the tools and so on he's just sawing and hammering and building a doghouse and you know what would happen if he built a second dog house what would be the marginal value product of this is labor in that second dockhouse it would be lower than the first so you see again we have this similar principle because we're finite beings in a finite world we have

these principles of diminishing effect if we continue to do certain things over and over and over again and so we get this second principle now let's go to the uh to the social economy and here what we want to do is uh just first introduce the the issue of economic calculation and the issue is this we've seen that each one of us will economize his or her own actions their own personal economy by using valuation just mental judgments personal judgments of the value of things personal assessment of the usefulness of the goods and so on

and so forth that this is how we act this is The Logical structure within which we engage in our particular actions then we asked this question is it possible then to use this process of valuation alone to arrange economizing use of resources in production and and consumer good allocation among different persons and so on in a division of labor that would be the question can can one person in other words through just subjective valuation in his or her own mind arrange for all of the different people in society in a division of labor you know

doing all the different tasks across the division of labor in an economizing way and hopefully you can see that the answer is to this is absolutely not and this is because subjective value is a personal judgment in the minds of different people and it isn't comparable or even known uh to any Outsider right to any third party and by the way this isn't just a problem of course of socialism it is a problem of socialism it's a problem that exists for every politically determined outcome of the use of resources in a division of labor the

politicians never repair to economic calculations in deciding to do this or that or the other thing right and so lacking that they can't economize the use of reason they can't do what what we would have them do socially as as consumers of the of the goods that are produced by these processes and so so this is the issue before us now one might say well okay that's all well and good but can't we just do this on our own then couldn't we just have a plebiscite and we could vote or whatever right we democracy we

could have Democratic socialism we could all just you know in every use of resources we could just vote every job that might be undertaken we could just vote people into this job would that be economizing and again you can see readily that this this doesn't solve the problem of the inability for uh one person or different people to be able to compare subjective values interpersonally it simply cannot be done and if it can't be done well then there isn't any possibility of sort of economizing by voting or or you know assignment of some sort or

by or by voting for Representatives that then vote for what being done right this this this is uh just a non-starter it just it's a logical uh misconception to think that this could work all right so how is this problem overcome well this problem has overcome as again you probably already know or we'll learn in the first couple of days of this week that it's overcome only in a market economy only in a market economy where people have property they can acquire they have freedom and property that they can acquire and use and so on

and then make exchanges and then as long as they develop into this process of the market develops into a monetary economy it becomes possible then to engage in economic calculation because once we have Exchange in terms of money we can in fact objectively tell who values something relative to money more than other people so the buyer of a good who pays the price values the goods subjectively rank orders the good above that money price and another consumer in the same store at the same time looking at the same thing who doesn't buy the good values

keeping the money relative to the goods so we do have a way of making relative comparisons in some common uh term the money unit right which allows for economic calculation all right so now let's just kind of sketch out what price Theory looks like and we'll make a few other comments as we go and explain this this framework um with respect to economic calculation and appraisement so this is price Theory this is the sketch or the structure of it right so the way in which we explain the prices of things in a market economy is

we start with preferences that people have and then we find that some people who own Goods are willing to supply them at certain prices that others who wish to acquire the goods are willing to pay and so we have supply and demand and then the individuals in the market you know come together and make trades and prices emerge in these trades and then once we have the prices of consumer goods these prices then generate two effects they generate expenditures for consumers and they generate revenue for entrepreneurs who have produced these Goods and then with the

revenue that entrepreneurs have obtained this funds their ability to demand factors of production and so the demand for the factors of production or the producer Goods is determined by our buying of the products that the entrepreneur produces and we can defund entrepreneurs by not buying the product and we can fund them or that's what we'd actually do we fund them by buying their products and so you can see how the value imputation process that we talked about before in personal terms is also mimicked here in monetary terms in the market economy so the bottom of

the diagram then deals with prices of producer Goods prices of Labor and land and capital goods and so on the demand from the entrepreneurs and then the supply which will come from the factor owners people own land and labor and so on and this will be just based upon their preferences and so we have again the same sort of logical pathway right and once we get once we get revenues once we get revenues of the I can't see that once we get revenues for the entrepreneur right in the middle part of the diagram and costs

on the lower part of the diagram we have the first uh entrepreneurial form of economic calculation which is what economists sometimes call gross profit or net income right entrepreneurs can compare the the costs of acquiring the input services with the revenues from uh that are generated by the sale of the output and by doing so they can engage then in economizing allocation of resources and again we'll fill in some of the gaps in this as we go but let's start with the simplest case we'll start with the top part of the diagram and do consumer

goods prices first and let's start with the simplest possible case let's say we have this person who owns the iPhone SE that I mentioned before on the right hand side this person is going to be the seller at least potentially a seller of the iPhone that he or she owns and for my purposes I want to start with this case this case is suppose the iPhone SE is last year's model suppose in other words this person bought the iPhone SE in 2022 let's say in the spring of 2022. so it's a it's a more than

a year old so it's a used consumer good and so by doing this we don't have to worry about the entrepreneur in production we'll get to that in the next step we just want to see in other words the basic principles that are always in play when people trade consumer goods and then prices for these consumer goods are established so these are the preferences for the seller and you can see that the the seller's uh minimum selling price the the at least on my preference rank is 230 dollars if the seller could find a buyer

who would offer 230 or more then the seller would sell his or her iPhone and you can see the preferences of the buyer with the iPhone in parenthesis indicating the buyer doesn't have this iPhone the preferences are the buyer are such that the maximum buying price to the buyer is 280 dollars so obviously there's a potential uh voluntary extra trade right a mutually advantageous trade at for example at 250 their preference ranking would be reversed in the reverse order the buyer would prefer the iPhone to the 250 the seller would prefer the 250 to the

iPhone so they can make a mutually advantageous trade and of course if we then allow for uh you know a more robust Market where there's competitive bidding by other buyers and competitive offering by other sellers uh we get we get you know the full apparatus if you will of the of the uh uh you know standard sort of Market actual Market in the in the real world but before we do that I want to make sure we we touch upon this uh basic logical structure of what's always involved in the demander the buyer demanding something

and the seller supplying something because again this will be important when we move to the entrepreneur so it always looks like this right just as we've depicted the demand uh by the buyer is always the value the good obtained is rank ordered above the value of the money given up and the opportunity cost the thing given up when the money is surrendered right can fall into one of two categories it can be the personal use of the thing so the buyer can just keep the money and use it to you know as a hedge against

uncertainty or something just hold on to the money right instead of expending it on this good or the buyer can try to find another seller we'll sell again more cheaply you know been in slightly better condition or something like this right that exhausts the possibilities either the buyer keeps his money or expense to someone else right those are The Logical possibilities if they if they expend it to someone else it's either to this seller or to some other seller it doesn't have to be for an iPhone right it could be for something else but that's

the point of seeing the logic of this and then a similar thing for the seller right when somebody sells something it's always the same logic the value of the money they receive is rank ordered above the value of the good that they give up that's why they sell that's their motive for selling and the value of the good given up always has the same two categories the person who sells the iPhone could keep it for personal use that's what they were doing with it before it was sold or they could instead of selling it to

the buyer that we have in mind here that could hold out and try to sell it to another buyer so the iPhone is either kept by the person or sold to someone or gifted right but we're looking at sales it's sold to someone if it's if it's not sold to buyer a it's sold to buyer B or C or D right they can hold out so those are The Logical possibilities and again this will be important when we get to the entrepreneur in just a minute uh now also we want to touch upon the point

of the uh that we alluded to earlier right that there is a law of demand that comes from the laws of utility so we know that if this buyer is acquiring an iPhone the buyer is thinking about the value of applying that iPhone to all of the most important acts of consumption that the buyer has in mind and since those would all be fulfilled by the first iPhone acquired so to speak if the buyer were to buy a second iPhone the second iPhone would have less marginal utility and therefore the buyer would be willing to

pay less for it right so only at lower prices would buyers quantity demand be larger and a similar thing then happens on the seller side there's a law of supply right we don't know I didn't stipulate how many iPhone se's this seller has maybe the seller is an Arbitrage activity right and buying up used iPhones and then reselling them maybe he's got a whole inventory of them well if so then the reason why the seller wouldn't sell out at some particular price depends upon their anticipation again of these opportunity costs given up maybe they want

to keep one for personal use maybe they think that buyers next month will pay more right and so only at higher prices would the quantity offered for sale be larger the law of supply now in addition to that of course in an actual Market we have this extra condition that we talked about before there can be competing buyers who will compete against each other by making bids for the good and competing sellers who compete against each other uh making competing offers or asks right and so we get this we get this logical structure now again

unlike the neoclassical economists and empirical economics the only empirical data point for Austrian analysis is point a in other words what we do in in price Theory we just look out into the market and we see what the price is so I took the opportunity to do this I went on the internet and I found a used trading site and this was on July 15th 2023 just week or so ago and the P star was 250 I find a Founder used last year's iPhone SCE for sale for 250 dollars that's what we're talking about why

is the price 250 dollars in this market at that at that moment in time oh by the way the quantity I just made up I don't know I don't know what the quantity is but I gotta have to have some number there right I mean there actually is a number I just don't I didn't research that so why is it 250 well it's 250 dollars because of the laws that supply and demand it's 250 because if if sellers at that moment offered higher prices than this the quantity demand would be reduced and the quantity Supply

that they're competing against would be increased and there would be excess Supply there would be sellers who could not find buyers and likewise on the downside it's 250 dollars because if buyers were to offer lower prices then the quantity supplied would be reduced and the quantity demand that they're competing against would be increased and there'd be excess demand and there's no point in excess demand and excess Supply this is contrary to the to the motives and and ends that the Traders have in mind or to put it a different way the um when the market

clears we get the maximum possible Mutual benefit from all the trades that are being made in the market and since that's the point of trading that tends to be the the outcome in the market right so we get this market clearing apparatus or we could say it uh we could say it this way when the market clears what happens is the the good in this case all the 210 iPhone se's the good gets allocated to the buyers or the people who value The Good the most relative to money and the money gets allocated to the

sellers of the good who value the money relative to the good most highly and therefore the good is allocated and the money is allocated in an economizing way this is what the market uh uh performs for us all right the result that we get from the market okay so now let's turn to the last step which is the question of production we want to move to producer prices right but to do that we need as we said in the schematic a few slides ago we need to introduce the entrepreneur who's producing the the good because

the entrepreneur producing the good is one demanding the factors of production so let's go to that case now here we need to recognize remember again that Austrian analysis is realistic and so we need to recognize that there can be different uh particular strategies that entrepreneurs might have about about their ask prices about their offer prices this is just an entrepreneurial business strategy as to how they engage in making an Ask price and so I've taken the case since I picked an iPhone I'm taking the case of what Apple seems to do when they have you

know offered the price right of the iPhone so now we're dealing with the this year's model the 2023 model which somewhat confusingly went for sale back in October I think of 2022 but I'm going to call this the 2023 model I don't know what the actual model designation is for this but you get the idea right so they started selling this model last October and they're going to sell it until until October this year that's how they do it right every model year is different than they update a little bit or radically change the design

or whatever and so that that's the setup and so the way in which Apple um their business strategy in asking the prices they in October when they first started selling these these iPhones they their ask price was 429 dollars if you go to their website that's what you can buy it for and they keep that price the same for the whole model year that's just one entrepreneurial strategy why do they do that well they do that because they think that the overall demand for the whole model is going to be something like again I've made

up a number 20 million I don't know if that you know kind of ballpark issues do how many they actually sell of this model every year whatever 20 million and they think that by selling uh 20 million of them at 429 dollars though they at least will not injure their revenue they'll get they'll get the most Revenue they can right they think in other words that they ask the price of 459 that the reduction in sales would reduce their revenues more than the increased Revenue per unit sold and likewise they think if they dropped their

price or left it at 399 which is what it was a couple years ago that they'd get more sales they'd sell more than 20 million but the Lost revenue on each iPhone would be greater than the revenue that they make up by selling more that's how they're thinking about this right with respect to the monetary result that by the way is what we call appraisment that's an act of appraisment when when Tim Cook and his entrepreneurial group decided on the ask price of 429 they did this back in the summer of of uh 2022 right

they did this long before the they actually you know started to ship them and so on they said where'd they come up with this prize Well they came up with this price by thinking about the impact on Revenue thinking about the overall demand in other words for the the phone over the model year that's how they do it or at least it seems from an outsider's view that that's how they do it now uh if you know anything about car dealers you know that that's not how they do it right it's just a business strategy

so car dealers it's the same kind of thing right they have a model year and it runs and they're selling the same thing for the whole year but they don't ask the same price over you know every day or week or whatever during the year if demand surges they they raise their price and if demand wanes they have a sale and so on it's just a business strategy as to how you do this so that's not really the material thing the material thing is the the entrepreneurs are trying to maximize their revenue from the sale

of the output however they think about this the particular process by which it's done so in my example they generate Apple would generate or they're anticipating and hence appraisment right they're anticipating generating 8.58 billion dollars in Revenue over the model year and if they do well then or if they're thinking this back in July then that provides them with the ability then to appraise their demand for the inputs so let's turn to this question let's say this is the anticipated or jargon in economics discounted marginal revenue product of the of employing the services of a

producer good in this case the the example I've used is computer hardware engineering so Apple hires some computer hardware engineers and they were paying them salaries back you know from the beginning of 2022 they're paying salaries and these Hardware Engineers are working on the upgraded model right they're redesigning it or whatever the internal structure of it and thinking about it make it more efficient or whatever and so uh Apple is appraising whether or not it's worth it to pay a salary of a certain amount to get the services of these Hardware Engineers will it pay

off in the in the sale of the good to the consumer that's the principle of diminishing or excuse me the principle of a discounted marginal revenue product the marginal revenue product is the revenue from the contribution of the input the discount comes because because the entrepreneur is paying in advance right again this is something we'll talk in detail about tomorrow the entrepreneur pays the computer hardware engineer in January of 2022 but they're not going to get the revenue until until 2023 is completed and so they're they're lending so to speak they're giving up money sooner

and acquiring money later so this commands an interest rate and it's always based on anticipation that's where we get appraisement again it isn't just that the entrepreneurs look at past profitability and they say oh now I know exactly what to do it's that their anticipations are are always made within the form of gross profit or within the form of economic calculation now the entrepreneur is constrained in this way because if the entrepreneur were to pay more than the discounted marginal revenue product for the service of the computer hardware engineer the entrepreneur would suffer a loss

on that on that Arrangement right and if they pay if they try to pay less they'll be outbid by the competing users the competing entrepreneurs for this for the service and so once again there's a law of demand the opportunity cost on the side of the computer hardware engineer follows the same principle we mentioned before the the computer hardware engineer will just compare the salary offered with uh keeping the services for himself or herself or selling the services to someone besides apple and then they'll just make a preference right and supply and so we get

this result and again I'll end with this we get this data too I looked up from the Bureau of Labor Statistics so this is the actual well it's what they record the data and then the actual precise data but the point is there is some precise payment that's being made for computer hardware engineers and the BLS said on again this was in 2022 uh that the salary for a computer hardware engineer was 128 170 a year and there were 76 900 computer hardware Engineers hired in the US economy that's what we're talking about that's what

we're trying to explain why is the price 128 170 why is it 150 or 200 000 why isn't a hundred thousand and the answer is the same right if if the price were Above This we'd have excess Supply if the price were below this we'd have excess demand the Traders some of the traders in those conditions would be unable to make their trades and they would engage in more aggressive bidding and offering in order to make their trades and the we'd move to this market clearing point and so this gets us to at least an

introduction to the prices of producer Goods now I'll say one last thing in closing the uh then again you'll see this all laid out in front of you over the next two days so I mentioned one thing about economic calculation which is for the entrepreneur which is uh gross profit right the costs and the revenues that guide the entrepreneurs production decisions the other major form of economic calculation is equity the balance sheet of a of a business which records asset values against liabilities right and so that is the economic calculation form that entrepreneurs use in

deciding whether or not to invest in various capital projects where they wind up owning not not buying the services of some Factor production but owning the factor of production itself so that's it thank you for your kind attention thank you