Principles of Economics by Carl Menger Chapter 5.1 - Price Formation in Isolated Exchange

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How does price actually form when two people trade with each other? In this video, we explore Carl Menger’s Principles of Economics, Chapter 5.1: Price Formation in Isolated Exchange.
Menger walks us through a simple but powerful example: one person has grain, the other has wine. Each values what they own less than what the other person has—but not by the same amount. That difference in personal valuation creates a range of possible prices, with a clear upper and lower limit.
Let’s say A won’t give more than 100 units of grain for 40 units of wine. And B won’t accept less than 80 units of grain in return. A trade can happen, but the price has to fall somewhere between 80 and 100. Within that range, bargaining begins—each side trying to get the best deal.
The final price depends on real-world factors: personality, knowledge, negotiation skill, and even luck. But over time, when both parties are equally skilled, Menger shows that prices tend to settle around the average of both valuations—in this case, 90 units of grain.
This principle shows that price isn’t fixed by cost or equality—it’s set by subjective value and the interaction of people trying to satisfy their needs. In isolated trades, prices are not mysterious. They emerge logically from what each person wants and is willing to give up.
If you want to truly understand how pricing works at its core, this video is for you.

❓ Questions This Video Answers:
-How is price formed in one-on-one trade?
-What sets the upper and lower limits of a price?
-Why do people bargain during a trade?
-What is a subjective equivalent in economics?
-Can the final price fall outside the valuation range?
-What happens if both parties are equally skilled?
-Why do prices settle near the average valuation?
-What role does negotiation play in pricing?
-How does knowledge or personality affect the deal?
-Why is cost not the core of price formation?

00:00 - Introduction to Price Formation in Isolated Exchange
00:13 - The Basics of Economic Exchange
00:32 - An Exchange Between Grain and Wine
01:35 - Bargaining and Price Settlement
02:15 - The Average Valuation
02:55 - Conclusion
03:23 - Outro

#PriceFormation #SubjectiveValue #CarlMenger