1.3 Price, cost and quantity indices

Economic phenomena can be approached from three different angles: we can study their prices, costs or quantities. Economists talk about price, cost and quantity indices.

Price index

Prices usually refer to the final price of a good, i.e. the price paid by the customer (consumer price) or the price paid to the producer of the good or service (producer price). For example, the taxi fare paid by a passenger is one good used in calculating the consumer price index. The fare paid by the customer minus VAT is the producer price received by the taxi entrepreneur.

Cost index

The price of each good and service is made up of several cost factors, such as wages, materials, rents, depreciations, interests, energy and transportations. For example, the cost index for taxi transportation measures the price development of cost factors that the taxi entrepreneur has to pay in order to run his business, i.e. the price development of wages, fuel, cars, servicing, etc. More precisely, then, the cost index should be called the price index of cost factors.

Quantity index

A quantity index measures the development of the volume of production, i.e. the increase or decrease in the number of goods or services produced or in the number of kilograms or litres produced compared to base period. In our taxi example, this means the increase or decrease in the number of kilometres that the taxi entrepreneur has driven during a certain period compared to base period.