Theory Of Price

AAA

DEFINITION of 'Theory Of Price'

An economic theory that contends that the price for any specific good/service is the relationship between the forces of supply and demand. The theory of price says that the point at which the benefit gained from those who demand the entity meets the seller's marginal costs is the most optimal market price for the good/service.

INVESTOPEDIA EXPLAINS 'Theory Of Price'

For example, suppose that market forces determine that it costs $5 for a widget. This suggests that widget buyers are willing to forgo the utility in $5 in order to possess the widget and that the widget seller perceives that $5 is a fair price in exchange for giving up the widget. This simple theory of determining prices is one of the core principles underlying economic theory.

RELATED TERMS
  1. Price Change

    The difference in the cost of an asset or security from one period ...
  2. Joint Supply

    An economic term referring to a product or process that can yield ...
  3. Window Of Opportunity

    A window of opportunity is a short time period during which an ...
  4. Demand

    An economic principle that describes a consumer's desire and ...
  5. Microeconomics

    The branch of economics that analyzes the market behavior of ...
  6. Macroeconomics

    The field of economics that studies the behavior of the aggregate ...
RELATED FAQS
  1. No results found.
Related Articles
  1. Economics

    Economics Basics

    Learn economics principles such as the relationship of supply and demand, elasticity, utility, and more!
  2. Entrepreneurship

    Cost-Push Inflation Versus Demand-Pull Inflation

    Gain a deeper understanding of aggregate supply and demand, forces which raise the price of goods and services.
  3. Options & Futures

    Explaining The World Through Macroeconomic Analysis

    From unemployment and inflation to government policy, learn what macroeconomics measures and how it affects everyone.
  4. Trading Strategies

    Trading On The Psychology Of Round Numbers

    Price action around big round numbers, like 10, 100 and 12000 set up special trading opportunities that take advantage of shifting crowd psychology.
  5. Forex

    The Impact Of Venezuela's Bolivar Exchange Rates

    Venezuela's complex exchange rate system has been a major cause of its economic woes. We examine the impacts, and the supply and demand of the bolivar.
  6. Economics

    Higher Oil Prices On the Horizon? Maybe Not.

    Despite a decision by some oil companies to reduce the overall supply of oil, a sustained ascent in oil prices might not be on the immediate horizon.
  7. Economics

    What's Demand Elasticity?

    Demand elasticity is the measure of how demand changes as other factors change. Demand elasticity is often referred to as price elasticity of demand because price is most often the factor used ...
  8. Trading Strategies

    A Legendary Market Skill Experience Traders Have

    Tape readers interpret complex background data during the market day to gain a definable trading edge over the competition.
  9. Personal Finance

    What Drives Consumer Demand for Tesla?

    Tesla did not invent the electric vehicle market, but it has brought to it elements of luxury and elite status. But what really drives demand for Teslas?
  10. Economics

    Law of Supply

    The law of supply is one of the most fundamental principles in microeconomics. According to the law of supply, for all other things remaining constant, the higher the price of a good or service, ...

You May Also Like

Hot Definitions
  1. Gordon Growth Model

    A model for determining the intrinsic value of a stock, based on a future series of dividends that grow at a constant rate. ...
  2. Cost Accounting

    A type of accounting process that aims to capture a company's costs of production by assessing the input costs of each step ...
  3. Law Of Supply

    A microeconomic law stating that, all other factors being equal, as the price of a good or service increases, the quantity ...
  4. Investment Grade

    A rating that indicates that a municipal or corporate bond has a relatively low risk of default. Bond rating firms, such ...
  5. Fringe Benefits

    A collection of various benefits provided by an employer, which are exempt from taxation as long as certain conditions are ...
  6. Irrevocable Trust

    A trust that can't be modified or terminated without the permission of the beneficiary. The grantor, having transferred assets ...
Trading Center