Microeconomics: Price Theory - Essay Example

Another important element which decides the price is how easily or how difficult is it to get the commodity or the service. Scarce commodities are considered much more important than commodities available in abundance hence there is a significance difference between the prices of scarce commodities and the commodities which are available in abundance. Let us now consider the demand aspect of the price theory, the demand aspect of the price theory is driven by an important factor which is how desperately a consumer is in need of that commodity or service.

If a consumer is urgently in need of the service or commodity, he/she wouldn’t mind spending even double the amount of money which they would have spent in normal circumstances. So the demand aspect of the price theory is all about the desire of the consumer to have that particular commodity or service at his/her disposal. Another important aspect which is very important is the demand curve; demand curve gives a good enough indication of the will of consumers to buy the commodity or the service at that particular price.

Demand curve and supply curves are studied by an organization to arrive at an equilibrium price. Equilibrium cost is the fixed cost and this changes only when the demand and supply is changed and it does not change unless the demand and supply changes. Let us now take into consideration the difference between luxury goods and necessities, the income elasticity of demand tends to be much higher in the case of luxury goods and this is because of a simple reason which is as people become wealthier there wants increase and they tend to spend more money on buying themselves luxuries.

The level of income of an individual goes on to decide what luxury is and what is necessity? For instance a rich person can stop buying bikes and as a replacement start collecting cars, this purely depends on the level