What is the Microeconomic Pricing Model?

A microeconomic pricing model refers to a model of setting prices for goods and services in an economy or a particular market. This pricing model places importance on the balance of supply and demand in the market, it is with this balance that prices are set. In this model also, who sets prices in the market is determined on the basis of demand and supply. In the Microeconomic Pricing Model, when consumers strive to maximize their utility based on their budget, the demand curve is realized. The supply curve of the other hand is realized when firms attempt to increase their profits with respect to the demand for their products and the costs for manufacturing them.

How does Microeconomic Pricing Model Work?

Usually, in the microeconomic pricing model, prices are set by whoever is more successful based on demand and supply. While some market participants are price takers, some are price markets in line with the balance of supply and demand in the market. In the market also, participants are led to a point of equilibrium price through profit incentives. For instance, in industries with no intense competition or limited dominating companies, prices will be set by the most successful companies. This is in contrast to a competitive masker where market prices are duly followed by participants who desire to sell the products.

Curve Movements

Generally, the equilibrium price is attained given the movement of the demand and supply curve. The direction at which these curves move determines whether there would be an increase in equilibrium price or a decrease. For instance, if the demand curve is static and the supply curve moves towards the left direction, there will be an increase in the equilibrium price. Also, when the demand curve moves to the right and the supply curve remains static, an increase will occur.

Related Topics

• Budget Constraint
• Radner Equilibrium
• Opportunity Cost
• Opportunity Set
• Marginal Analysis
• Utility

• Self Interest
• Cost-Benefit Analysis
• Enlightened Self-Interest
• Fisher's Separation Theorem
• Ratchet Effect

• Total Utility (Economics)
• Efficiency Principle
• Expected Utility
• Subjective Theory of Value
• Positional Goods
• Utilitarianism
• Indifference Curve
• Time Preference Theory of Interest
• Incentives
• Marginal Benefit

• Diminishing Marginal Utility
• Sunk Costs
• Production Possibilities Frontier
• Law of Diminishing Returns
• Economic Efficiency
• Efficiency Theory
• Productive Efficiency
• Capacity Utilization Rate
• Allocative Efficiency
• Pareto Efficient
• Comparative Advantage
• Criticisms of the Economic Approach
• Behavioral Economics
• Normative Economics
• Positive Economics
• Invisible Hand
• Sunk cost