Price Theory in Economics

This article describes how prices are treated in economic theory. Section 17.2 begins by introducing the concepts of ‘rational preference’ and ‘utility function’, which are standard building blocks of models that attempt to explain choice behaviour. Section 17.3 introduces the notion of a Walrasian equilibrium, where supply equals demand and market prices are determined by the self-interested behaviour of market participants. Section 17.4 considers the possibility of disequilibrium and Walrasian âtonnement as a price-adjustment process in an otherwise stationary economy. Section 17.5 deals with the problem of ‘externalities’, where agents' actions are payoff-relevant to other agents. Sections 17.6 and 17.7 consider strategic interactions between agents, in the presence of complete and incomplete information, respectively. Section 17.8 deals with dynamic pricing issues and Section 17.9 mentions some of the persistent behavioural irregularities that are not well captured by classical price theory. Section 17.10 concludes and provides a number of directions from which further research contributions may be expected.