Microeconomic Pricing Model

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.

BREAKING DOWN '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. Equilibrium Quantity

    The quantity of an item that will be demanded at the point of ...
  2. Demand

    An economic principle that describes a consumer's desire and ...
  3. Model Risk

    A type of risk that occurs when a financial model used to measure ...
  4. Theory Of The Firm

    A microeconomic concept founded in neoclassical economics that ...
  5. Quantity Supplied

    A term used in economics to describe the amount of goods or services ...
  6. Competitive Equilibriums

    An equilibrium condition where the interaction of profit-maximizing ...
Related Articles
  1. Markets

    What Is Supply?

    Supply is the amount of goods a producer is willing to produce at a given price, and is one of the most basic concepts in economics.
  2. Markets

    Introduction To Supply And Demand

    Find out all about supply and demand and how it relates to your daily purchases.
  3. Markets

    What Is Equilibrium?

    Equilibrium is a state of balanced supply and demand.
  4. Markets

    Economics Basics: Supply and Demand

    Investopedia explains: The Law of Demand, The Law of Supply, Supply and Demand Relationship, Equilibrium, Disequilibrium, and Shifts vs. Movement
  5. Investing

    Calculating (Small) Company Credit Risk

    Determining creditworthiness of smaller and medium-sized corporations isn't as easy as for larger companies, but these tips can help.
  6. Investing

    What is a Business Model?

    Business model is the term for a company’s plan as to how it will earn revenue.
  7. Investing

    Understanding Financial Models

    A financial model is a representation of some aspects of a firm or given security. It uses historical numbers to create calculations that inform financial recommendations or predict future financial ...
  8. Trading

    Build a Profitable Trading Model In 7 Easy Steps

    Trading models can provide a powerful tool for building profit. Traders can use and customize existing trading models or build an original model. This article provides seven steps to building ...
  9. Markets

    Macroeconomics: Supply, Demand and Elasticity

    By Stephen Simpson DemandDemand is driven by utility – the pleasure or satisfaction that a consumer obtains from consuming a good or service. Total utility is a function of the quantities ...
  10. Markets

    Getting To Know Business Models

    Learning how to assess business models helps investors identify companies that are the best investments.
RELATED FAQS
  1. How does the invisible hand affect prices in the Microeconomic Pricing Model?

    Find out why the microeconomic pricing model cannot accurately describe economic phenomena, and how it misses the real causes ... Read Answer >>
  2. How does the law of supply and demand affect prices?

    Learn what the law of supply and demand is, what relationship it has with prices, and how the law of supply and demand affects ... Read Answer >>
  3. Is demand or supply more important to the economy?

    Learn more about the impact of supply and demand in an economy. Find out why companies study supply and demand as part of ... Read Answer >>
  4. What's the difference between regular supply and demand and aggregate supply and ...

    Understand how businesses use supply and demand and aggregate supply and demand to forecast economic activity. Learn about ... Read Answer >>
  5. What is the point of developing a business model?

    Learn some of the benefits of developing a business model and how business models are used. Consider an example of business ... Read Answer >>
  6. Why are microeconomic models different in the short run than the long run

    Find out why short-run and long-run microeconomic models treat production, costs and variable change using different given ... Read Answer >>
Hot Definitions
  1. Duration

    A measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates. ...
  2. Dove

    An economic policy advisor who promotes monetary policies that involve the maintenance of low interest rates, believing that ...
  3. Cyclical Stock

    An equity security whose price is affected by ups and downs in the overall economy. Cyclical stocks typically relate to companies ...
  4. Front Running

    The unethical practice of a broker trading an equity based on information from the analyst department before his or her clients ...
  5. After-Hours Trading - AHT

    Trading after regular trading hours on the major exchanges. The increasing popularity of electronic communication networks ...
  6. Omnibus Account

    An account between two futures merchants (brokers). It involves the transaction of individual accounts which are combined ...
Trading Center