Price
What is a Price?
A price is the dollar value ascribed to a thing that is in effect agreed between
buyer and seller. In some circumstances the seller sets a non-negotiable price,
but the price is still 'agreed' by the act of the buyer accepting the price. In
the strict economic theory sense price is the point where demand and supply hit
equilibrium (price is a regulating mechanism between demand and supply). For
example if demand increases and supply is constant then the price that people
are willing to pay will rise; when the price rises, suppliers will look to maximize
profits by selling more; if supply rises more than is demanded then the price
will fall - and this process continually happens, thus "price" is one
of the most important facets of the market economy.
How does it relate to Markets?
Just as price is an important regulating mechanism in the real economy, in the
financial markets price is also a powerful regulating force, and a rich source
of signals and information. Price in the capital markets serves to allocate
capital to the most efficient ends. In the stock market price is a function of
supply and demand (i.e. order flow), and as a result or driver of this is the
underlying fundamentals of the stock/company
e.g. expected earnings, dividend yields, etc. The demand-supply balance in
financial markets is far more complex and interesting, it is driven by views on
where the fundamentals will go, as well as required buying/selling, often of
hundreds or thousands of people. The supply side is also driven by
short-selling, and bearish views as much as exiting existing positions. Price
contains information because of the way it reacts to future expectations and new
information as it surfaces (both publicly, and indirectly available).
Sources and further reading:
Investopedia - Economics Basics: Elasticity
Encyclopedia Britannica - Price system
Library of Economics and Liberty - Price controls
economics.fundamentalfinance.com - Price floors
Graph Library:
n/a
Original Source:
http://www.econgrapher.com/encyclopedia-price.html
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