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. Value-Based Pricing

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

    An economic term referring to the effect that a change in a firm's ...
  5. Average Cost Pricing Rule

    A pricing strategy that regulators impose on certain businesses ...
  6. Current Liquidity

    The total amount of cash and unaffiliated holdings compared to ...
Related Articles
  1. Great Expectations: Forecasting Sales ...
    Fundamental Analysis

    Great Expectations: Forecasting Sales ...

  2. How Bond Market Pricing Works
    Bonds & Fixed Income

    How Bond Market Pricing Works

  3. What Determines Gas Prices?
    Economics

    What Determines Gas Prices?

  4. Do Cheap Imported Goods Cost Americans ...
    Economics

    Do Cheap Imported Goods Cost Americans ...

Hot Definitions
  1. Gross Rate Of Return

    The total rate of return on an investment before the deduction of any fees or expenses. The gross rate of return is quoted ...
  2. Debit Spread

    Two options with different market prices that an investor trades on the same underlying security. The higher priced option ...
  3. Leading Indicator

    A measurable economic factor that changes before the economy starts to follow a particular pattern or trend. Leading indicators ...
  4. Wage-Price Spiral

    A macroeconomic theory to explain the cause-and-effect relationship between rising wages and rising prices, or inflation. ...
  5. Accelerated Depreciation

    Any method of depreciation used for accounting or income tax purposes that allows greater deductions in the earlier years ...
  6. Call Risk

    The risk, faced by a holder of a callable bond, that a bond issuer will take advantage of the callable bond feature and redeem ...
Trading Center