Question

4. Explain Adam Smith’s notions of natural and market prices. What, according to Smith, determines the natural price, the value, of commodities in “an early and rude state of society”? How does this change once stock has been accumulated? Elaborate

Answer 1

Natural price refers to the price which is equal to the cost of production. While market price is actual price that prevails in the market.

According to Adam Smith, in rude state of society, land and capital are not owned by anyone. Hence, labor is only important source of production. Hence, value or price of good is determined by number of labor hours used to produce such goods.

On other side, when land and capital are owned by people. Accumulation of capital becomes crucial factor of production, hence, payments to all factors are considered while determining natural price of commodity. Hence, in this market, price or value is determined by the cost of production.