Theory of Price
Why do consumers buy the products they buy? There are many factors including available alternatives, consumer income, and marketing. Let’s refine the question; what influences consumers to spend what they spend on goods and services? That is the central question of the “Theory of Price”. From Investopedia.com, the Theory of Price is
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.
So goods and services are ideally priced at exactly what they cost to produce in terms of materials and effort. Congratulations! Of course there are many pieces to this theory of determining optimal price. Key concepts include economy of scale, marginal costs, opportunity costs, and scarcity. This simple idea (things should be priced according to the cost of production) is actually quite complex in practice.
While studying this concept I came across this excellent PDF from California State University. It’s a wide-ranging but relatively easy-reading document, and as soon as the Suns-Celtics game is over I’ll give it the attention it deserves!
