But is it valid to suggest that a price of an important input such as oil is a key determinant of the prices of goods and services?
Now producers of goods and services set asking prices. It is also true that producers whilst setting prices take into account various production costs including the cost of energy.
Whether the asking price set by producers is going to be realised in the market place hinges on consumers’ acceptance of the price set. Consumers dictate whether the price set by producers is “right”.
On this Mises wrote,
The consumers patronize those shops in which they can buy what they want at the cheapest price. Their buying and their abstention from buying decides who should own and run the plants and the farms. They determine precisely what should be produced, in what quality, and in what quantities.[1]
If consumers don’t have the money to support the prices asked by producers then the prices asked cannot be realised.
What is a price? It is the rate of exchange between goods established in a transaction. The price, or the rate of exchange of one good in terms of another, is the amount of the other good divided by the amount of the first good.
In a money economy, price will be the amount of money divided by the first good. A price is the sum of money paid for a unit of a good.
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