Demand Price

Consider the example of Roland Nottingham, a retired business executive who is interested in purchasing a handcrafted picnic table for his back patio. Roland plans to spend a great deal of time relaxing at his picnic table on the crisp sunny spring mornings that can only be found in Shady Valley. The anticipated satisfaction means Roland is willing to pay $150 for a table.

In contrast, Pollyanna Pumpernickel, a divorced mother of two who works as an office manager for Dr. Dowrimple T. Bedside, is also in the market for a picnic table. Paula expects to use her table a few times during the summer months when her deadbeat ex-husband stops by for a family barbecue with their two daughters. Based on limited use, Paula is willing to pay only $75 for a table.

The market price of picnic tables in Shady Valley ultimately depends, at least in part, on the price that Roland, Paula, and other potential purchases are willing to pay. If most buyers are like Roland, then the market price is likely to be closer to $150. Paula will find that market price exceeds her anticipated satisfaction and will not make the purchase. If most buyers are like Paula, then the market price is likely to be closer to $75. Roland will find that market price is less than his anticipated satisfaction and will gladly make the purchase.

Supply Price

The usual presumption is that the supply price is an immutable fact of nature. Such is not the case. The supply price is based on the opportunity cost of production--what producers need to pay labor, capital, land, and entrepreneurship to produce one good over another. Opportunity cost depends on the value of foregone production, in particular the satisfaction that buyers give up when a good is not produced.

Consider the Shady Valley picnic table market once again. Becky Carpenter is a professional woodcrafter, specializing in picnic tables and outdoor furniture. When considering the fabrication of a picnic table, Becky first calculates that needed materials cost $50. She then determines that it takes five hours of her time, which she values at $10 per hour. Lastly, she adds in an extra $25 for profit, wear and tear on her tools, and general overhead. Her asking supply price is thus $125 per table. She is not willing to sell a picnic table for less.

What makes this supply price subjective? Consider the $10 per hour Becky sets for her hourly wage. This is based on the $10 wage that Becky could receive in an alternative job. In a competitive world, this is the wage Becky could be earning installing asphalt shingles or fixing clogged toilets. These other potential employers are willing to pay $10 an hour because Becky adds $10 worth of valuable production each hour. But the value of these foregone products is also determined based on the subjective satisfaction of wants and needs of the buyers.

Because the opportunity cost of the other inputs has a similar interpretation, the conclusion is that supply price is as subjectively derived as is the demand price.

Subjective For All