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.

  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. Pricing Power

    An economic term referring to the effect that a change in a firm's ...
  4. Value-Based Pricing

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

    A pricing strategy that regulators impose on certain businesses ...
  6. Elastic

    A situation in which the supply and demand for a good or service ...
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. Investing Basics

    Why Interest Rates Affect Everyone

    Learn why interest rates are one of the most important economic variables and how every individual and business is affected by rate changes.
  7. Investing

    Where the Price is Right for Dividends

    There are two broad schools of thought for equity income investing: The first pays the highest dividend yields and the second focuses on healthy yields.
  8. Personal Finance

    How Tech Can Help with 3 Behavioral Finance Biases

    Even if you’re a finance or statistics expert, you’re not immune to common decision-making mistakes that can negatively impact your finances.
  9. Investing Basics

    5 Tips For Diversifying Your Portfolio

    A diversified portfolio will protect you in a tough market. Get some solid tips here!
  10. Entrepreneurship

    Identifying And Managing Business Risks

    There are a lot of risks associated with running a business, but there are an equal number of ways to prepare for and manage them.
  1. How do you make working capital adjustments in transfer pricing?

    Transfer pricing refers to prices that a multinational company or group charges a second party operating in a different tax ... Read Full Answer >>
  2. Do interest rates increase during a recession?

    Interest rates rarely increase during a recession. Actually, the opposite tends to happen; as the economy contracts, interest ... Read Full Answer >>
  3. How can the federal reserve increase aggregate demand?

    The Federal Reserve can increase aggregate demand in indirect ways by lowering interest rates. Aggregate demand is a measure ... Read Full Answer >>
  4. What is the utility function and how is it calculated?

    In economics, utility function is an important concept that measures preferences over a set of goods and services. Utility ... Read Full Answer >>
  5. What does marginal utility tell us about consumer choice?

    In microeconomics, utility represents a way to relate the amount of goods consumed to the amount of happiness or satisfaction ... Read Full Answer >>
  6. What bond indexes follow the supply and demand for junk bonds?

    Bond indexes that track junk bonds include the Merrill Lynch High Yield Master II Index and the S&P U.S. High Yield Corporate ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Turkey

    Slang for an investment that yields disappointing results or turns out worse than expected. Failed business deals, securities ...
  2. Barefoot Pilgrim

    A slang term for an unsophisticated investor who loses all of his or her wealth by trading equities in the stock market. ...
  3. Quick Ratio

    The quick ratio is an indicator of a company’s short-term liquidity. The quick ratio measures a company’s ability to meet ...
  4. Black Tuesday

    October 29, 1929, when the DJIA fell 12% - one of the largest one-day drops in stock market history. More than 16 million ...
  5. Black Monday

    October 19, 1987, when the Dow Jones Industrial Average (DJIA) lost almost 22% in a single day. That event marked the beginning ...
  6. Monetary Policy

    Monetary policy is the actions of a central bank, currency board or other regulatory committee that determine the size and ...
Trading Center