Normal Price
What is normal price?
Though the term “normal price” is often used colloquilly to refer to the most common or non-sale price for a particular item, normal price has a technical definition in economics.
In economics, normal price is the equilibrium price of a good or service under perfect competition. Perfect competition is a hypothetical situation in a free-market where:
- individual buyers and sellers do not have control over prices
- all buyers and sellers seek to maximize their profits
- buyers and sellers can freely enter and leave markets
- all buyers and sellers have information about the prices, quality and availability of goods
- all particular types of goods are substitutable for one each other
Perfect competition is also called “perfect market” or “pure competition.”
How is normal price calculated?
Normal price is the lowest possible average total cost of production plus normal profit. However, normal profit is when total revenues equal total costs under perfect competition and is thus only the minimum rate required by equity investors to maintain their investment.