What is Price Theory, Rent Theory and Value Theory?

What is Price Theory, Rent Theory and Value Theory?

June 26, 2021 Off By Felso

Adam Smith’s Theories

Price Theory

According to Adam Smith, there is a real price and a nominal price. The real price is the cost incurred in acquiring the good; depends on labor; In the long run, the real price is valid for all goods, that is, it depends on labor. Nominal price, on the other hand, is the price resulting from the change in the supply and demand balance or the change in market conditions in the short run.

market price; It is formed by the quantity of the good and the demand of those who can buy this good. Two terms must be distinguished here: effective demand is the demand of those who are in a position to pay for the good or service. It departs from absolute demand; Absolute demand is the desire to have a good or service.

If the effective demand for a good increases, the price of that good will rise; but because the market price is high, firms will think that there is a high profit on that good and enter the market; this will increase supply due to the increase in the number of firms, and the increase in supply will balance with the increase in effective demand and prices will decrease. Also, the opposite is true.

Smith emphasizes that the balance of supply and demand has changed in agriculture and industry. Agricultural sector usually determines their supply according to the prices of the previous years. However, price changes in the industrial sector affect supply and demand more quickly.

Rent Theory

Adam Smith speaks of five types of rent:

a. net revenue
b. Rent (rent) is the price given to landlords in order to produce from the land.
c. The profits of the landowners due to their monopolistic status: This understanding is similar to the 2nd understanding.
D. Distance from markets affects rent: Land far from markets has high rents, far places have low rents.
to. Rarity rent: Rarity rent is the profit obtained due to the high price of a good compared to the effort spent on the good due to the low demand in the market but high demand.

Value Theory

According to A. Smith, a good has two kinds of value: First, the benefit of that good to the person, and second, the exchange value of that good with other goods.

The first value usually varies from person to person, depends on the value given by the person and is difficult to calculate for society.

The second (exchange) value is equal to the amount of this good in exchange for other units of goods. Since the value depends on the labor expended in acquiring that good, it is labor, not goods, that are exchanged. Labor is the measure of exchange value.

Sometimes the most useful goods have very little exchange value, and the useful goods have a large exchange value. The best examples of this are water and diamonds. The benefit of water is much more than the benefit of diamond, but diamond is much more expensive than water; because a great deal of effort was spent in obtaining the diamond and it increased its exchange value. We can also speak of the rarity rent.