Microeconomic Pricing Model

AAA

DEFINITION of 'Microeconomic Pricing Model'

A model of the way prices are set within a market for a given good. According to this model, prices are set based on the balance of supply and demand in the market. In general, profit incentives are said to resemble an "invisible hand" that guides competing participants to an equilibrium price.


The demand curve in this model is determined by consumers attempting to maximize their utility, given their budget. The supply curve is set by firms attempting to maximize profits, given their costs of production and the level of demand for their product. To maximize profits, the pricing model is based around producing a quantity of goods at which total revenue minus total costs is at its greatest.

INVESTOPEDIA EXPLAINS 'Microeconomic Pricing Model'

In general, the balance of power within the market determines who is more successful in setting prices. For example, a monopolist, such as a utility company, has a great deal of power to set prices at the most advantageous point for the firm. On the other hand, in a perfectly competitive market, such as farming, firms have little choice but to accept the prevailing market price if they wish to sell their goods.



RELATED TERMS
  1. Peak Pricing

    A form of congestion pricing where customers pay an additional ...
  2. Basing Point Pricing System

    A pricing system in which the buyer pays a base price plus a ...
  3. Average Cost Pricing Rule

    A pricing strategy that regulators impose on certain businesses ...
  4. Value-Based Pricing

    The setting of a product or service's price, based on the benefits ...
  5. Pricing Power

    An economic term referring to the effect that a change in a firm's ...
  6. Cape Cod Method

    A method used to calculate loss reserves that uses weights proportional ...
RELATED FAQS
  1. What is price variance in cost accounting?

    Price variance in cost accounting is the difference between the actual price paid by a company to purchase an item and its ... Read Full Answer >>
  2. What do you need to know to create a business model?

    A business model lays out the idea for a business, along with the step-by-step plan for making the business profitable. To ... Read Full Answer >>
  3. Do any markets not exhibit asymmetric information?

    Asymmetric information, when interpreted literally, means that two parties to an economic transaction have different information ... Read Full Answer >>
  4. What are the benefits of using ceteris paribus assumptions in economics?

    Most, though not all, economists rely on ceteris paribus conditions to build and test economic models. The reason they do ... Read Full Answer >>
  5. How is fair value calculated in the futures market?

    The fair value is the theoretical calculation of how a futures stock index contract should be valued considering the current ... Read Full Answer >>
  6. What is the difference between the rule of 70 and the rule of 72?

    The rule of 70 and the rule of 72 give rough estimates of the number of years it would take for a certain variable to double. ... Read Full Answer >>
Related Articles
  1. Fundamental Analysis

    Great Expectations: Forecasting Sales Growth

    Predicting sales growth can be something of a black art, unless you ask the right questions.
  2. Bonds & Fixed Income

    How Bond Market Pricing Works

    Learn the basic rules that govern how bond prices are determined.
  3. Economics

    What Determines Gas Prices?

    Gas prices are influenced by more than supply and demand. Find out what determines the price you pay at the pump.
  4. Economics

    Do Cheap Imported Goods Cost Americans Jobs?

    Flooding the market with cheap products can mean job losses and even market collapse - but dumping isn't as threatening as it seems.
  5. Options & Futures

    Mark-To-Market Mayhem

    Did this accounting convention contribute to the credit crisis of 2008? Find out here.
  6. Fundamental Analysis

    Calculating Future Value

    Future value is the value of an asset or cash at a specified date in the future that is equivalent in value to a specified sum today.
  7. Economics

    What is Deadweight Loss?

    Mainly used in economics, deadweight loss can be applied to any deficiency caused by an inefficient allocation of resources.
  8. Economics

    How to Do a Cost-Benefit Analysis

    The benefits of a given situation or business-related action are summed and then the costs associated with taking that action are subtracted.
  9. Economics

    Gaining Market Influence-- The Case of US Shale

    A convergence of sustained bank financing, falling production costs and rising oil prices might position the US shale industry for a greater market role.
  10. Economics

    The Big Chill: What’s Wrong With The U.S. Consumer

    Based on the most recent April data, investors may, once again, be disappointed when the second-quarter gross domestic product (GDP) report comes in.

You May Also Like

Hot Definitions
  1. Butterfly Spread

    A neutral option strategy combining bull and bear spreads. Butterfly spreads use four option contracts with the same expiration ...
  2. Unlevered Beta

    A type of metric that compares the risk of an unlevered company to the risk of the market. The unlevered beta is the beta ...
  3. Moving Average - MA

    A widely used indicator in technical analysis that helps smooth out price action by filtering out the “noise” from random ...
  4. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  5. Productivity

    An economic measure of output per unit of input. Inputs include labor and capital, while output is typically measured in ...
  6. Variance

    The spread between numbers in a data set, measuring Variance is calculated by taking the differences between each number ...
Trading Center