Microeconomic Pricing Model
Categories: Econ, Financial Theory
The invisible hand of supply and demand is the basis for the microeconomic pricing model, which determines how prices are set for goods and services.
You know the graph: the classic supply and demand crossing, with equilibrium being the point at which the two curves cross. The equilibrium corresponds to a price on the y-axis and a market quantity on the x-axis.
The demand curve in the microeconomic pricing model is downward sloping, since consumers are willing to buy more of a thing the cheaper it is. On the flip-side, the supply curve in the pricing model is upward sloping, because sellers are willing to make and sell more of a good the higher they can set the price for it. It’s where these two forces meet that prices for goods and services are set, i.e. the microeconomic pricing model.
Of course, this kind of model is pretty simplistic compared to the real world. For companies that have little competition (like oligopolies and monopolies), firms are not price takers, but price makers, setting their own prices (higher than they would be in the “free market”) to maximize revenue.