Relative Prices and Nominal Prices ________________________________________________________________________________________________________________________________________________ absolute price: The monetary or “nominal” price of anything is also sometimes called its absolute price. ________________________________________________________________________________________________________________________________________________ Monetary (Nominal) Prices Opportunity costs may be only loosely related to monetary (absolute) prices. Nominal prices are prices in terms of some monetary unit. Prices in the United States are commonly stated in dollars and cents, but these nominal prices could also be stated in francs, pesos, or yen. For example, if dollars and yen were equally acceptable for purchases and $1 could be exchanged for 125 yen, just divide any price stated in yen by 125 to figure the dollar price. Tourists and international traders quickly master such mental gymnastics and become indifferent about which currency is used to state nominal prices. Relative Prices Opportunity costs as measured by relative prices shape most decisions—how many hot fudge sundaes must be sacrificed for a new compact disk? For a ski vacation? Answers to such questions entail comparisons of monetary prices. Relative prices are the prices of goods or resources in terms of each other, and are computed by dividing their absolute prices by one another. Rational decision making focuses on relative prices, which embody tremendous amounts of information about sacrificed alternatives. If hot fudge sundaes are $2 while CDs are $14 and ski vacations are $560, then a CD costs 7 sundaes and a ski vacation costs 280 sundaes or 40 CDs. (14/2= 7; 560/2= 280; 560/14= 40.
________________________________________________________________________________________________________________________________________________ Author: Ralph Byrns
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