The nature of the price and characteristics of its formation

According to Milton Friedman, price has five functions in a free-enterprise exchange economy which is characterized by private ownership of the means of production: Transmitting information about changes in the relative importance of different end-products and factors of production. Providing an incentive to enterprise a) To produce those products valued most highly by the market； b) To use methods of production that economize relatively scarce factors of production； Providing an incentive to owners of resources to direct them into the most highly remunerated uses； Distributing output among the owners of resources； Rationing fixed supplies of goods among consumers.；

The paradox of value was observed and debated by classical economists. Adam Smith described what is now called the diamond – water paradox: diamonds command a higher price than water, yet water is essential for life and diamonds are merely ornamentation. Use value was supposed to give some measure of usefulness, later refined as marginal benefit while exchange value was the measure of how much one good was in terms of another, namely what is now called relative price.

One solution offered to the paradox of the value is through the theory of marginal utility proposed by Carl Menger, one of the founders of the Austrian School of economics.

As William Barber put it, human volition, the human subject, was "brought to the centre of the stage" by marginalist economics, as a bargaining tool. Neoclassical economists sought to clarify choices open to producers and consumers in market situations, and thus "fears that cleavages in the economic structure might be unbridgeable could be suppressed".

Price is commonly confused with the notion of cost of production, as in "I paid a high cost for buying my new plasma television"; but technically these are different concepts. Price is what a buyer pays to acquire products from a seller. Cost of production concerns the seller's expenses (e.g., manufacturing expense) in producing the product being exchanged with a buyer. For marketing organizations seeking to make a profit, the hope is that price will exceed cost of production so that the organization can see financial gain from the transaction.