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. What are some real-life examples of the economies of scope?

    Real-world examples of economies of scope can be seen in mergers and acquisitions (M&A), newly discovered uses of resource ... Read Full Answer >>
  2. How reliable or accurate is marginal analysis?

    Marginal analysis is designed to show how economic reasoning allows actors to accomplish more by understanding limits on ... Read Full Answer >>
  3. What is the difference between research and development and product development?

    The difference between research and development and product development is that research and development is the conception ... Read Full Answer >>
  4. What is the difference between marginal analysis and cost benefit analysis?

    Marginal analysis describes the technique used in cost-benefit analysis. Consider it analogous to using the principles of ... Read Full Answer >>
  5. What is the purpose of the Herfindahl-Hirschman Index?

    The Herfindahl-Hirschman Index (HHI) evaluates the concentration of a firm in a market. It is used by the government to ... Read Full Answer >>
  6. What are the different types of price discrimination and how are they used?

    Price discrimination is one of the competitive practices used by larger, established businesses in an attempt to profit from ... Read Full Answer >>
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. Economics

    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.
  5. Economics

    What is a Management Buyout?

    A management buyout, or MBO, is a transaction where a company's management team purchases the assets and operations of the business they manage.
  6. Economics

    Modified Internal Rate of Return (MIRR)

    Modified internal rate of return (MIRR) is a variant of the more traditional internal rate of return calculation.
  7. Economics

    Explaining Cash On Delivery

    Cash on delivery, also referred to as COD, is a method of shipping goods to buyers who do not have credit terms with the seller.
  8. Credit & Loans

    What's a Revolving Line of Credit?

    A revolving line of credit is an arrangement made between a company or an individual and a bank to borrow money on a short-term basis.
  9. Economics

    Understanding Horizontal Integration

    Horizontal integration is the acquisition or internal creation of related businesses to a company’s current business focus.
  10. Economics

    Understanding Marginal Benefit

    Marginal benefit is an economic term that describes the maximum amount a consumer is willing to pay for an additional unit of a good or service.

You May Also Like

Hot Definitions
  1. Geometric Mean

    The average of a set of products, the calculation of which is commonly used to determine the performance results of an investment ...
  2. Fisher Effect

    An economic theory proposed by economist Irving Fisher that describes the relationship between inflation and both real and ...
  3. Fiduciary

    1. A person legally appointed and authorized to hold assets in trust for another person. The fiduciary manages the assets ...
  4. Expected Return

    The amount one would anticipate receiving on an investment that has various known or expected rates of return. For example, ...
  5. Carrying Value

    An accounting measure of value, where the value of an asset or a company is based on the figures in the company's balance ...
  6. Capital Account

    A national account that shows the net change in asset ownership for a nation. The capital account is the net result of public ...
Trading Center