by Jack Roviere

Created on: March 11, 2007   Last Updated: February 15, 2009

When discussing price in economics, one must realize that this concept differs whether one lives in a market economy (such as one that most of the world's nations have), or a planned/command economy (such as that of Cuba's), or even a traditional economy (which very few nations keep for very long). However, because pricing and competition most directly influence economic actions in a market economy, then when discussing the concept of price, it is best to talk from the perspective of a market economy.

Price reflects the shared symbol of consumers' willingness and ability to purchase a good at each level of quantity (or 'demand') or suppliers' willingness and ability to produce a good at each level of quantity ('supply). If prices is too high, people will purchase a lower quantity of a good or they may not purchase at all. Producers can see this signal and then lower prices in response (that is, if they have the power to do so), thus working toward a price point that they and their consumers can mutually be happy with - market equilibrium.

The range of prices that consumers are willing and able to buy goods at (for demand is the level of 'willingness' and 'ability' to purchase) depends on specific features. If consumers have more income or wealth, for example, then they are more able to buy goods, and so the price of goods will reasonably increase as suppliers realize they can make more profit. When more women started entering the work force, for example, this increased the incomes of families highly, so producers, responding the signals from the market that people were buying more stuff (because they were able to), rasied prices.

Income is not the only thing that affects price, of course. If the price of a complementary good decreases (say, the price of hot dog buns decreases), then consumers will demand more of the good's complement (such as the actual hot dog wieners), which will increase the price of wieners as producers recognize that people are more willing to buy more wieners to take advantage of the deals they are getting on buns. However, if the price of buns were to increase, then demand for wieners would decrease and wiener producers would scramble to lower prices to entice people will lower demand.

Consumer expectations play a vital role in price increase or decrease. When people believe that oil will be more scarce in the future (in the summertime or if OPEC reports that it is specifically cutting oil production), then demand in the short run will increase (people will scramble to buy now to avoid higher prices). Interestingly enough, as people are more willing to buy now because of expectations of lower supply and higher prices in the future, this actually causes prices to rise as suppliers realize people will be inelastic to the change. This explains why, when gas production is jeopardized, prices skyrocket and some gas stations may gouge prices.

Finally, demand can change based on changes in consumer tastes...but most times, economists believe that tastes are constant - they can't predict when bell bottoms or baggy pants or ANY good will go out of style, but if it does happen to go out of style, economists can see this retroactively by analyzing the past.

When discussing price, one must remember that it is a value of total demand, so if one doesn't want to pay what he believes to be an exorbitantly high price, that does NOT mean the price will lower for him. It simply means, instead, that there ARE other people who would pay that price, and they believe that price is reasonable.

Learn more about this author, Jack Roviere.
Click here to send this author comments or questions.