Modern price theory (MPT) can be used to explain how total income is shared among those who provide labour, capital and land to produce goods. With the development of MPT many economists began to distinguish between price as an objectively determined fact and value, a term according to economists (but not valuers) that has ethical and political connotations outside the general province of economics. For example, benefit cost analysis (BCA).

The basic concept of MPT is that at any given market price the amount of a good produced and offered for sale and the amount of that good purchased will equalise. The schedule of amounts that will be offered for sale at various prices is called the supply schedule and the schedule of amounts that will be purchased at various prices is called the demand schedule.


There are several assumptions underlying the theory of demand:

The following factors determine whether a consumer is willing and able to purchase a given quantity of a good within a given period:


Quantity is inversely related to price. For example, if residential houses in a certain suburb fall in price, the quantity demanded will increase.


Higher incomes usually mean that more units of a good will be purchased but sometimes the opposite is true. "Inferior" goods are substitutes for the more desirable goods and a rising income will cause a consumer to reduce purchases of the inferior good.


The demand for inferior housing in a "rundown" suburb may fall with higher incomes or an increase in income may mean that the demand for rental accommodation falls and the demand for privately owned cottages rise.

See price of related commodities

See principle of substitution

See complementary commodities

See consumer expectations

See the principle of anticipation (expectation)

See consumer taste and preference

See demand schedule

See supply

See market price