Price theory explains why consumers buy goods or services from a particular company based on the agreed price and intrinsic value. External factors such as competition, demand, and market size also affect price. A supply and demand graph shows the equilibrium point where companies and consumers agree on the price. Companies are willing to increase supply at higher prices, while consumers demand lower prices for goods they perceive as having little value. Competing products, consumer demand, and market size affect the theory of price.
Price theory is an economic concept that defines how or why a consumer will buy a good or service from a particular company. For this transaction to take place, both the company and the consumer must agree on the price of the item, which is intrinsically linked to the value of the product. Price and value are two important factors for the circulation of goods or services in the economic market. Price theory can also include external factors, such as the number of competing products, aggregate consumer demand, and the size of the overall economic market.
In a free market economy, economists typically explain price theory using a basic graph of supply and demand. This graph helps companies understand at what price they will sell the majority of goods or services, thus maximizing their financial returns. In a right-angle chart, the horizontal line represents price and the vertical represents quantity. The supply curve starts at the lower left corner and slopes up to the right. The demand curve begins in the upper left corner and slopes down and to the right. The intersection of these lines is known as the equilibrium point, where companies and consumers will agree on the price of the product.
The supply and demand graph indicates that according to price theory, firms are more willing to increase supply at higher prices because profits are higher. However, consumers are typically unwilling to pay high prices for goods they believe have little or no value. Conversely, demand is high when prices are low, although some firms are unwilling to sell many goods of this nature due to low profit.
The number of competing products in the economic market can influence the theory or the price. Competing companies will try to undersell other companies by offering similar goods at a lower price, which in turn will shift the equilibrium price point for goods and services. Companies that offer inferior or substitute products can also drive the market away from a branded product.
Consumer demand and the size of the overall economic market also influence the theory of price. Consumers who don’t want to buy a good or service will force companies to lower the price of the item until consumers deem it valuable enough to buy it at a specific price. For example, a company that makes cookware might find that consumers are more interested in cookware. Having too many cookware for sale at a high price will typically result in fewer or no sales for the business. The company must lower the price of its pots to the point where consumers are willing to buy them and attempt to rethink their manufacturing strategy.
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