For political economists, the theory of the determination of price does not take the central role that it

does in mainstream theory. This is because it is determined in a very different way and serves a very
different function. Discuss, focusing on one pricing model developed by political economists.
Within an economy, how prices are determined are an important factor. However, when deciding how
goods and services are priced, there are multiple theories on how the basis of pricing should occur. For
neoclassical, there is a large emphasis on scarcity of resources and how these resources should be
distributed for optimal economic activities. In comparison, political economists believe that it is much
more complicated. There is a lot more consideration of an imperfect market using models such as the
Eichners model. The political economists try and create a better understand of the realistic conditions
of the real world economy as well as, giving a perception on how pricing can relate to profits.
Neoclassical economists base most theories on the supply and demand of goods and services. In this,
they believe scarcity is the basis of how goods and services are priced. The importance of supply and
demand for pricing, believed by neoclassical should be the equilibrium of the supply and demand of
goods and services. Further, this idea is demonstrated consistently throughout the majority of
neoclassical theories. Although, this can be seen to be an optimal method of pricing, it should be noted
that with neoclassical economics, there is an assumption of perfect market and competition. In reality,
this is simply not true. In the real economy, there are externalities, multiple barriers to entry,
asymmetric knowledge and heterogeneous factors. In addition, to assume perfect competition must
assume rational behaviour of humans which is unrealistic.
Another determination of pricing used by neoclassical economist requires the cost curve. The cost curve
provides a deeper understanding of the supply and demand curve relating to marginal cost, variable
cost, average variable cost and marginal revenue. The traditional cost curve graph is a curve decreasing
to its lowest point then increasing again, like a parabola. In textbook wise, there are three curves which
are considered. These are the average fixed cost curve, the average variable cost curve and the marginal
cost curve. With neoclassical theory, it is optimal in the long run to have average variable cost equal to
the marginal cost, or when the two curves intersect. There are major problems with this idea. First of all,
it also assumes perfect competition. This is not realistic and cannot be applied to the real world
economy. Further, it is hard for a company to measure marginal cost or marginal revenue, as well as
average variable cost. This is because in these costs, they do not consider costs which are indirectly
within the production process such as advertising and customer calls.
In comparison, the political economic approach creates a better applicable idea to the method of
pricing. Through the Eichner model, it follows are more complicated oligopolistic system with a price
leader, also known as a megacorp. Megacorps are large firms which general set a price on a good or
service and other companies will follow. Through this, firms are able to be more competitive in an
imperfectly competitive market, which also allows for oligopolistic markets. Further, in the model, firms
growth targets are met through investments, internal funding and external funding. When the megacorp
has set the price, it is to yield the highest or targeted return to meet these growth plans.
In Eichners model, the analysis involves factors such as the engineer rated capacity, standard operating
ration and output to explain what happens when full capacity is reached. In the model, the average
variable cost stays constant until the engineer rated capacity is at 100%. This means that costs will then
increase as the output increase due to the firm reaching full capacity. While the average fixed variable
cost will decrease until it engineering rated capacity is at 100%, then it will increase with variable cost. In

addition, with the sum of average variable cost, fixed variable cost and average corporate levy, it can be
seen that the price will decrease as output increase until the engineering rate capacity reaches 100%,
then there will be an increase in price as output increases.
In conclusion, there are major differences between the methods of pricing between neoclassical and
political economists. This is based on the different beliefs of the economy would work under different
conditions. As stated by Joan Robinson, Economics is a box of tools- the art of being a good economist
is choosing the appropriate one for the problem at hand. Both methods are logical and in a sense,
should work on some problems with the economy and on the understanding of how prices are
determined. However, both do have flaws and both can be better in the theories. With neoclassical idea
of pricing determined by supply and demand to the Eichner model in the political economic stance, it
can be understood that pricing is a complex matter at hand and should be understood the best way
dependent on the situation of the economy.

Notes:

Peter Kreisler lecture slides

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Lavoie, M, Louis-Philippe Rochon, and Mario Seccareccia. Money And Macrodynamics. Armonk,
N.Y.: M.E. Sharpe, 2010. Print.