Relative price
The price of good i relative to the price of good j is given by p i /p j . This ratio measures the rate at which good i can be exchanged for good j and is what matters for economic choices. For example, the real wage is the wage paid for labour relative to the price of consumption and determines the trade-off between consumption and labour for a consumer. Two sets of prices represent the same set of relative prices if it is possible to change one set to the other by multiplying each price by a constant λ. This observation motivates the use of a numeraire commodity to allow all prices to be expressed relative to the price of the numeraire.
A relative price is the price of a commodity such as a good or service in terms of another; i.e., the ratio of two prices. A relative price may be expressed in terms of a ratio between any two prices or the ratio between the price of one particular good and a weighted average of all other goods available in the market. A relative price is an opportunity cost. Microeconomics can be seen as the study of how economic agents react to changes in relative prices.
In the demand equation Q = f(P) (in which Q is the number of units of a good or service demanded), P is the relative price of the good or service rather than the nominal price. It is the change in a relative price that prompts a change in demand. For example, if all prices rise by 10% there is no change in any relative prices, so if consumers' nominal income and wealth also go up by 10% leaving real income and real wealth unchanged, then demand for each good or service will be unaffected. But if the price of a particular good goes up by, say, 2% while the prices of the other goods and services go down enough that the overall price level is unchanged, then the relative price of the particular good has increased, and unless the good is a Giffen good the demand for it will go down.
Often inflation makes it difficult for economic agents to immediately distinguish increases in the price of a good which are due to relative price changes from changes in the price which are due to inflation of prices in general. This situation can lead to allocative inefficiency, and is one of the negative effects of inflation.
External links
This entry is from Wikipedia, the leading user-contributed encyclopedia. It may not have been reviewed by professional editors (see full disclaimer)
Related topics:
Related answers:
Help us answer these:
Post a question - any question - to the WikiAnswers community:
- What is relative price?
- Family or relative's of Leontyne Price?
- What does it mean when a stock price is high relative to recent price action?
» More
- Distinguish money prices from relative prices?
- What is the definition of average of price relatives?
- What is relative price level?
» More
- Nikkei (trademark)
- Dow Jones Averages (trademark)
- Value Line Investment Survey (business term)
- Price Index (business term)
- Shopping Products (business term)
- Joint Product Cost (business term)
- Premium Over Bond Value (finance term)
- Penny Stock (in accounting)
- price sensitive (in marketing)
- Trance Anthems, Vol. 2 [Deca Dance] (2001 Album by Various Artists)
- Premium (finance term)
- Laffer Curve Theory (American history)
- Blackwater Side (1998 Album by Bert Jansch)
- Trance Anthems [Deca Dance] (2001 Album by Various Artists)
» More» More