ArtsAutosBooksBusinessEducationEntertainmentFamilyFashionFoodGamesGenderHealthHolidaysHomeHubPagesPersonal FinancePetsPoliticsReligionSportsTechnologyTravel

Economic Theory of Price and Its Determination

Updated on March 6, 2016
icv profile image

IRSHAD CV has been a student in Economics. Now he is doing Masters in Economics. He completed B.A. Economics from the University of Calicut.

Price in terms of money is the single factor by which people can meet their needs.
Price in terms of money is the single factor by which people can meet their needs. | Source


Price refers to the value of a commodity and services expressed in terms of money. Now we are fixing price for any kind of goods and services. Even consider a labor we fix a price for his service in terms of wage. It is essential to deliver an economic transaction very smoothly. For this, only money should play its role properly. Here this hub is about the theory of determination of price of goods and services.

Functions of Price

In the early time, people were practiced ‘Barter’ system for the exchanging of goods and services. Now almost all the economies are using money for exchanging goods and services. So, money plays a vital role in modern economy. There are different views on money from the early time onwards. Now, people are using highly advanced form of money like e-money. In other words money is the single factor of representing price of a commodity. Price has some economic influences. Some of them are described below.

I) Medium of exchange

As said above, the collapse of ‘Barter’ system leads to the invention of money. In the early time, most of the money was in the form of precious metals. Gradually, banks and central banks were fount out or launched and began to use various types of paper currencies and coins.

II) Unit of account

Now, the value of goods and services are measured in terms of money. Here money acts like a measure to account the value of commodities. So, money considered as a unit of measure.

III) Incentive to production

A high price always encourages the sellers and producers to sell or produce more. Suppose the wage is very high, normally laborers have a tendency to work more or suppose the price of the commodity is high then the producers would ready to produce more, because they want more profits.

IV) Signaling mechanism

Suppose the price of a product is high, automatically the consumers may have a tendency to consume related complimentary goods (complimentary goods are those different goods which can be used to satisfy a particular want or use). Similarly, producers, investors, savers, money lenders etc are also use the trends in price to reduce their risk and maximize utility.

Price Determination

In a perfect competitive market price is determined at the interaction point of both demand and supply curves. Demand curve is inversely related with price (when price increase the demand will decrease) and supply is directly related with price (when price increase supply also increases).

The theory of price determination can be explained with the following figure

Here consider Apple is the commodity. In the diagram consider price is ‘P’. At point ‘P’ the quantity demanded of Apple is equal to the quantity supplied. Here point ‘E’ is the equilibrium point and ‘P’ is the equilibrium price of the commodity Apple.

Consider price ‘P1’ the demand for Apple, then the supply is high while demand is less. This condition is known as “excess supply”

Consider price ‘P2’ the demand of Apple, where the demand for is more than its supply. This condition known as “excess demand”

Since at point ‘E’ the quantity supplied is equal to the quantity demanded, ‘E’ is the equilibrium point and ‘P’ is the market determined price. This is the simple representation of the determination of price and quantity demanded for a commodity. Similarly other commodities in the market will be demanded. This is the automatic adjustment model of price determination propounded by the classical economists.


    0 of 8192 characters used
    Post Comment

    • icv profile imageAUTHOR


      3 years ago

      thanks therawspirit for your comment... I agree with you that the theory is not the reality particularly of todays.... Now the form of money has changed in to electronic one such as paypal, net banking etc

    • the rawspirit profile image

      Robert Morgan 

      3 years ago from Hutchinson Island, FL - Myrtle Beach, SC - Scottsdale AZ

      Your insights into price determination are very well grounded. The sad thing is, theoretically everything you have stated works if the plying field is level and honesty is the foundation so that your formula. Today we have so much behind the scenes manipulation in price to value determination that its difficult to carry out your stated theory. Blessing my friend and may you and your family prosper.


    This website uses cookies

    As a user in the EEA, your approval is needed on a few things. To provide a better website experience, uses cookies (and other similar technologies) and may collect, process, and share personal data. Please choose which areas of our service you consent to our doing so.

    For more information on managing or withdrawing consents and how we handle data, visit our Privacy Policy at:

    Show Details
    HubPages Device IDThis is used to identify particular browsers or devices when the access the service, and is used for security reasons.
    LoginThis is necessary to sign in to the HubPages Service.
    Google RecaptchaThis is used to prevent bots and spam. (Privacy Policy)
    AkismetThis is used to detect comment spam. (Privacy Policy)
    HubPages Google AnalyticsThis is used to provide data on traffic to our website, all personally identifyable data is anonymized. (Privacy Policy)
    HubPages Traffic PixelThis is used to collect data on traffic to articles and other pages on our site. Unless you are signed in to a HubPages account, all personally identifiable information is anonymized.
    Amazon Web ServicesThis is a cloud services platform that we used to host our service. (Privacy Policy)
    CloudflareThis is a cloud CDN service that we use to efficiently deliver files required for our service to operate such as javascript, cascading style sheets, images, and videos. (Privacy Policy)
    Google Hosted LibrariesJavascript software libraries such as jQuery are loaded at endpoints on the or domains, for performance and efficiency reasons. (Privacy Policy)
    Google Custom SearchThis is feature allows you to search the site. (Privacy Policy)
    Google MapsSome articles have Google Maps embedded in them. (Privacy Policy)
    Google ChartsThis is used to display charts and graphs on articles and the author center. (Privacy Policy)
    Google AdSense Host APIThis service allows you to sign up for or associate a Google AdSense account with HubPages, so that you can earn money from ads on your articles. No data is shared unless you engage with this feature. (Privacy Policy)
    Google YouTubeSome articles have YouTube videos embedded in them. (Privacy Policy)
    VimeoSome articles have Vimeo videos embedded in them. (Privacy Policy)
    PaypalThis is used for a registered author who enrolls in the HubPages Earnings program and requests to be paid via PayPal. No data is shared with Paypal unless you engage with this feature. (Privacy Policy)
    Facebook LoginYou can use this to streamline signing up for, or signing in to your Hubpages account. No data is shared with Facebook unless you engage with this feature. (Privacy Policy)
    MavenThis supports the Maven widget and search functionality. (Privacy Policy)
    Google AdSenseThis is an ad network. (Privacy Policy)
    Google DoubleClickGoogle provides ad serving technology and runs an ad network. (Privacy Policy)
    Index ExchangeThis is an ad network. (Privacy Policy)
    SovrnThis is an ad network. (Privacy Policy)
    Facebook AdsThis is an ad network. (Privacy Policy)
    Amazon Unified Ad MarketplaceThis is an ad network. (Privacy Policy)
    AppNexusThis is an ad network. (Privacy Policy)
    OpenxThis is an ad network. (Privacy Policy)
    Rubicon ProjectThis is an ad network. (Privacy Policy)
    TripleLiftThis is an ad network. (Privacy Policy)
    Say MediaWe partner with Say Media to deliver ad campaigns on our sites. (Privacy Policy)
    Remarketing PixelsWe may use remarketing pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to advertise the HubPages Service to people that have visited our sites.
    Conversion Tracking PixelsWe may use conversion tracking pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to identify when an advertisement has successfully resulted in the desired action, such as signing up for the HubPages Service or publishing an article on the HubPages Service.
    Author Google AnalyticsThis is used to provide traffic data and reports to the authors of articles on the HubPages Service. (Privacy Policy)
    ComscoreComScore is a media measurement and analytics company providing marketing data and analytics to enterprises, media and advertising agencies, and publishers. Non-consent will result in ComScore only processing obfuscated personal data. (Privacy Policy)
    Amazon Tracking PixelSome articles display amazon products as part of the Amazon Affiliate program, this pixel provides traffic statistics for those products (Privacy Policy)