Key AS Micro Terms: Prices

The price mechanism figures heavily in the AS micro syllabus. Below we have provided definitions of some key terms and also link to recent blog items and revision presentations

Asking price: The price at which a security, commodity or currency is offered for sale on the market - generally the lowest price the seller will accept

Buyer’s market: A market that favours buyers because supply is plentiful relative to demand and therefore prices are relatively low. The opposite of a seller’s market

Equilibrium: Equilibrium means ‘at rest’ or ‘a state of balance’ - i.e. a situation where there is no tendency for change

Excess demand: The difference between the quantity supplied and the higher quantity demanded when price is set below the equilibrium price. This will result in queuing and an upward pressure on price

Excess supply: When supply is greater than demand and there are unsold goods in the market. Surpluses put downward pressure on the market price

Freemium: A business model, especially on the Internet, whereby basic services are provided free of charge ( a zero price) while more advanced features must be paid for

Market equilibrium price: Equilibrium means a state of equality between demand and supply. Without a shift in demand and/or supply there will be no change in market price. Prices where demand and supply are out of balance are termed points of disequilibrium. Changes in the conditions of demand or supply will shift the demand or supply curves. This will cause changes in the equilibrium price and quantity in the market.

Market incentives: Market signals that motivate economic actors (i.e. consumer and businesses) to change their behaviour (perhaps in the direction of greater economic efficiency). Behavioural economics studies some of the incentive effects.

Maximum price: The Government can set a legally imposed maximum price in a market that suppliers cannot exceed - in an attempt to prevent the market price from rising above a certain level. To be effective a maximum price has to be set below the free market price. One example of a maximum price might be for foodstuffs when a shortage of essential foodstuffs threatens a very large rise in the free market price.

Minimum price: A minimum price is a legally imposed price floor below which the normal market price cannot fall. To be effective the minimum price has to be set above the normal equilibrium price. A good example is the minimum wage.

Peak pricing: When a business raises prices at a time when demand is strongest

Penetration pricing: Where a firm choose to set a low price to gain market share / brand recognition

Price mechanism: The price mechanism is the means by which decisions of consumers and businesses interact to determine the allocation of resources between different goods and services

Price signals: Price signals are a vital part of a market system. Changes in price act as a signal about the way that scarce resources should be allocated. For example a rise in price encourages producers to switch into making that good but encourages consumers to reduce to use an alternative substitute product (therefore rationing the product). Government intervention in the market may be designed to change relative prices and therefore change producer and consumer decisions.

Signalling: Prices have a signalling function because the price in a market sends important information to producers and consumers