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), P is relative price rather than the nominal price. It is the change in relative price that prompts a change in demand. If all prices rise 10% there is no change in the relative price and demand will be unaffected.

[edit] See also

• Price

[edit] External links

• Jargon Explained

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