Price

Price is the monetary value assigned to a good or service in a voluntary exchange. It represents the amount a buyer is willing to pay and a seller is willing to accept, given information, alternatives, and risk. In markets, price acts as a signal that coordinates supply and demand, allocates scarce resources, and conveys information about relative scarcity and value.

Prices are determined by interactions of supply and demand. The quantity supplied increases with price, while quantity demanded decreases. The resulting equilibrium price is the market-clearing price where the two quantities are equal. Factors influencing price include production costs, technology, input prices, product quality, competition, expectations about the future, and government policies. The responsiveness of quantity demanded or supplied to price changes is measured by price elasticity.

Different market features shape price formation. In competitive markets with many buyers and sellers, prices tend toward equilibrium. In imperfect markets, sellers may have market power that allows pricing above marginal cost. Price formation also occurs through negotiated bargaining, auctions, or pricing strategies used by firms, such as dynamic pricing, price discrimination, and tiered pricing.

Policy tools affect prices. Price controls set legal limits on how high or low prices can be (price ceilings and floors). Inflation erodes purchasing power and can shift price levels across the economy. Price indices track changes in average prices over time, aiding macroeconomic policy and contract adjustments. Welfare analysis uses price to examine consumer and producer surplus and potential deadweight losses from mispricing.