Theory Of Price

A A A

DEFINITION

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

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 to another. ...
  2. Joint Supply

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

    A window of opportunity is a short time period during which an otherwise unattainable ...
  4. Macroeconomics

    The field of economics that studies the behavior of the aggregate economy. Macroeconomics ...
  5. Microeconomics

    The branch of economics that analyzes the market behavior of individual consumers ...
  6. Demand

    An economic principle that describes a consumer's desire and willingness to ...
  7. Supply

    A fundamental economic concept that describes the total amount of a specific ...
  8. Market Price

    The current price at which an asset or service can be bought or sold. Economic ...
  9. Marginal Rate of Technical Substitution

    The rate at which one factor has to be decreased in order to retain the same ...
  10. Absolute Advantage

    The ability of a country, individual, company or region to produce a good or ...
Related Articles
  1. Explaining The World Through Macroeconomic ...
    Options & Futures

    Explaining The World Through Macroeconomic ...

  2. Cost-Push Inflation Versus Demand-Pull ...
    Entrepreneurship

    Cost-Push Inflation Versus Demand-Pull ...

  3. Economics Basics
    Economics

    Economics Basics

  4. Great Company Or Growing Industry?
    Markets

    Great Company Or Growing Industry?

  5. Financialization
    Markets

    Financialization

  6. Price Elasticity Of Demand
    Economics

    Price Elasticity Of Demand

  7. The Austrian School Of Economics
    Economics

    The Austrian School Of Economics

  8. Introduction To Supply And Demand
    Economics

    Introduction To Supply And Demand

  9. Explaining Comparative Advantage
    Economics

    Explaining Comparative Advantage

  10. Basic Concept Of Absolute Advantage ...
    Economics

    Basic Concept Of Absolute Advantage ...

comments powered by Disqus
Hot Definitions
  1. Amplitude

    The difference in price from the midpoint of a trough to the midpoint of a peak of a security. Amplitude is positive when calculating a bullish retracement (when calculating from trough to peak) and negative when calculating a bearish retracement (when calculating from peak to trough).
  2. Ascending Triangle

    A bullish chart pattern used in technical analysis that is easily recognizable by the distinct shape created by two trendlines. In an ascending triangle, one trendline is drawn horizontally at a level that has historically prevented the price from heading higher, while the second trendline connects a series of increasing troughs.
  3. National Best Bid and Offer - NBBO

    A term applying to the SEC requirement that brokers must guarantee customers the best available ask price when they buy securities and the best available bid price when they sell securities.
  4. Maintenance Margin

    The minimum amount of equity that must be maintained in a margin account. In the context of the NYSE and FINRA, after an investor has bought securities on margin, the minimum required level of margin is 25% of the total market value of the securities in the margin account.
  5. Leased Bank Guarantee

    A bank guarantee that is leased to a third party for a specific fee. The issuing bank will conduct due diligence on the creditworthiness of the customer looking to secure a bank guarantee, then lease a guarantee to that customer for a set amount of money and over a set period of time, typically less than two years.
  6. Degree Of Financial Leverage - DFL

    A ratio that measures the sensitivity of a company’s earnings per share (EPS) to fluctuations in its operating income, as a result of changes in its capital structure. Degree of Financial Leverage (DFL) measures the percentage change in EPS for a unit change in earnings before interest and taxes (EBIT).
Trading Center