9. Price relations

17 March 2005

To contents, Introduction, Chapter 10

  1. Price relations
  2. Adding price relations
  3. Rules for prices
  4. Examples

1 Price relations

The price is a relation between flows in a payment layer and a real flows layer. It measures how much money is paid for  a given amount of commodities. Money flow (CU/year) = price (CU/pmy) * commodity flow (pmy/year). CU = currency units, pmy = produced man-years. 

Figure 1. Price relation as shown in  Chapter 2 of the theory.

The ECF program shows the same relation as:

Figure 2. Price relation shown by ECF program.

The price is set by the seller of the goods. The symbol  denotes a price relation prescribed by the supplier and  denotes the price relation calculated for the customer. The system has two flows (Payment and Purchase) and two conditions are needed to define the solution. One is the price set by the supplier and the other is the purchased quantity determined by the customer. The price is 60,000 dollars for 2 produced man-years = 30,000 dollar/pmy. 

2 Adding price relations

The price relation of figure 2 is added from the Sector properties dialog which is opened by right clicking the Supplier sector symbol. 
Figure 3. Sector properties dialog before adding a price relation.

The money layer and the commodity layer have to be chosen first. The the available money flows and the commodity flows are listed in the drop down menus in the next row. In this case, there is only one of each so they are already chosen. Click the Add price button and the Sector properties dialog is now:.
Figure 4. Sector properties dialog after adding a price relation and defining the name of it.

A new price row appears and the Add price button is grayed out. The money flow and the commodity flow are now used and can not be used in an other price relation. The Edit... button opens a dialog for editing the price relation. The Remove button removes the price relation and we are back to the situation in figure. 3.
Figure 5. Price properties dialog with the prescribed price set for year 1998.

The first row of the Price properties dialog has a text field for editing the name and a check box to set the prescribed state. The second row has drop down menus for choosing price and commodity units. The magnitude of the price values varies according to the choices. The prescribed prices can be edited only if the Prescribe price checkbox has been checked before. 

3 Rules for prices

Some rules have to be followed for a price relation to make sense. The program will warn if some rules are violated while others will give no warning. The user has to make his own judgment whether the price is used in a sensible way. A false usage will result in unrealistic results.

  1. Flows have to belong to different model layers.
  2. A flow can not be used in more than one price.
  3. Flow that belong to the same price should be in opposite directions, one into and the other out from a sector.
  4. Units should have been assigned to the flows. See Units chapter.

4 Examples

Wages and product prices.

A simple economic system with producers and consumers (households) is shown in figure 6, PriceEx2.xml in the file ECFModels.zip. The households spend all their income and the producers hire personal for their income. The households deliver work to the production and the products are consumed by the households. The money flow is a closed loop but the chain of work start with the households, passes a production process which output is products that end up in the households. Note that there is no direct relation between the work delivered by the households and their consumption of products. 

The system has four flows that has to be determined by four conditions:

  1. Flow balance of producers sales value and cost personal costs.
  2. Work done = 50 thousand worked man-years (kwmy).
  3. Output of products = 50 thousand produced man-years (kpmy).
  4. The wage level = 200 thousand Kr/wmy.

There is a flow balance for the payments of the households also, but it follows from the closed system and an additional fifth condition can not be imposed on the system.

The calculations below are for one year.

The wages paid = work * wage level = 50 kwmy * 200 kKr/wmy = 10,000 * 1000 kKr = 10,000 MKr. The productivity factor is flow of products / flow of work = 50 kpmy / 50 kwmy = 1 pmy/wmy. The price of products can now be calculated to 10,000 MKr / 50 kpmy = 200 kKr/pmy.

Figure 6. Producers with a productivity factor = 1 pmy/wmy.

If the productivity factor now is raised to 1.6 pmy/wmy then 80 kpmy of products will be produced. The price of products will fall to 10,000MKr / 80 kpmy = 125 kKr/pmy.
Figure 7. Producers with a productivity factor = 1.6 pmy/wmy.

The productivity factor was not specified for the producers but calculated from the product flow. Next version 2.6, of the ECF program will have processes for which productivity can be specified. 
Figure 8. The interior of the real flow layer of the producers sector. 

The product flow as a function of time for the PriceEx2.xml model is:
Figure 9. Product flow increases from 50 kpmy/year to 80 kpmy/year.

The calculated price of products will be:
Figure 10. Price of products decreases from 200 kKr/pmy to 125 kKr/pmy.

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