The formula for determining price begins by considering the economy where there are unsold items! ?

Let's say there is a formula: Sales - Expenses = Profit.

p=price, Ax=sales quantity, x=production quantity, MC=marginal cost

pAx – xMC = π

π＝０

p=(xMC)/(Ax)

We will call this formula the price formula. However, marginal cost MC represents the increase in cost when one more product is produced. Producing 101 products reduces the additional machine cost per product, i.e. fixed cost, by making 101 products rather than 100. If the cost of the machine to produce is $500, then for the 100th product it is 500/100 = $5, and for the 101st product it is 500/101 = $4.95. By adding the variable cost per unit, i.e. the cost of materials, which has the same cost, to this fixed cost, we can calculate the total cost per product.

In economics, if you take the sales volume Ax in the price formula and multiply it by the production volume x and p, and the cost is C, then px-C=π. In this case, the production volume x is in a state where all the production volume is sold, that is, the number of units produced and the number sold are equal, so the production volume Ax = production volume x. This state where everything is sold is called Say's Law in economics. It is the assumption that everything supplied can be sold. Unlike a hundred years ago when production capacity was low, today there is an oversupply, that is, there is enough machinery and equipment to produce more than people want. When x and Ax in the price formula, that is, the production volume and sales volume, are equal, then p=MC, which is the formula for maximizing profits in microeconomics. In other words, the point where the price and marginal cost per unit of a product are equal, which we will call the price and average cost from here on, is the point where the price and cost per unit are equal, and this is the formula for maximizing profits. If variable cost is $5, then the total cost of the 100th unit is $5 + $5 = $10, and the total cost of the 101st unit is $4.95 + $5 = $9.95. So the marginal cost of the 100th unit is $10, and the marginal cost of the 101st unit is $9.95.

Let's rewrite the previous price formula from p=(xMC)/Ax to p=(xAc)/Ax. In other words, we change the marginal cost MC to the average cost Ac.

In this price equation, when sales volume (Ax) increases, price (p) falls. Conversely, when sales volume decreases, price rises. The general equilibrium theory of demand and supply curves learned in microeconomics shows that this is a balanced supply and demand equation in which price rises when demand (sales volume) increases, and price falls when demand decreases.

The relationship between the supply and demand equation and the price equation shows that when demand (sales volume) increases, the price rises in the supply and demand equation, and the price falls in the price equation.

Image training. Let's calculate it here!

Production volume 15 = x

Sales quantity 10 units = Ax

Average cost $5 = Ac

p = (15 x 5)/10 = $7.5. If there are 5 unsold units, the price will be $7.5 based on the average cost of $5. In other words, the total cost is 5 x 15 = $75, so the sales revenue is 7.5 x 10 = $75. Since the sales revenue and total cost are equal, the profit is zero, but the company is still able to break even.

p = (5 x 5)/5 = $5. If there are no unsold items, the price and average cost are the same. Total cost is 5 x 5 = $25, and sales are 5 x 5 = $25, so sales and total cost are equal and profits are zero.

(Q) Now, I would like to set a question. How can we make this pricing formula more practical?

Below, we will explain Fisher's equation of exchange.

Fisher's equation of exchange is MV=PT, also known as the quantity theory of money. M=money supply (money stock), V=velocity of money, P=price, T=real GDP. V=velocity of money is also expressed as V=1/credit multiplier.

From the formula Money Stock = Credit Multiplier x Monetary Base, the money stock is M in Fisher's equation of exchange, and the credit multiplier is expressed as the velocity of money circulation V, so V = 1/credit multiplier, so (Money Stock) x (1/credit multiplier) = MV = Monetary Base = PT = Price Levels x Real GDP = Nominal GDP. Here, comparing V = (1/credit multiplier) with Marshall's k in the Cambridge Quantity Theory of Money, we get V = (1/Marshall's k), and credit multiplier = Marshall's k. Furthermore, monetary base = nominal GDP.

The monetary base is calculated by adding the following four values: money supply, central bank balance sheet, bank balance sheet, and foreign exchange reserves. In Japan, the monetary base is equal to the nominal GDP of Japan, i.e., "Bank of Japan note issuance" + "currency in circulation" + "current account deposits at the Bank of Japan". Conversely, if the monetary base is expanded, the nominal GDP may increase. In terms of causal relationship, it is not clear whether the monetary base or the nominal GDP comes first, but the concept of the monetary base is essential for nominal economic growth. Since the monetary base = prices and real GDP, if you want to suppress inflation, which is high prices, you can see that you can lower the monetary base. In addition, it is the price of money (1/p). In other words, since p is the price, I would like to point out that its inverse is the value of the currency.

(★Assignment★) The following is continued from the ★ mark. Using statistical data, compare the monetary base and nominal GDP figures. The same currency may be used in several countries.