Relative prices
Topic: Markets, Equilibrium and Government Intervention · NCERT: Class 11, Ch 2 "Indian Economy 1950-1990"
Meaning
A relative price is the price of one good compared with the prices of other goods. It shows how many units of other goods you give up to buy it. Relative prices are the real signal that guides buyers and producers. If all prices double together, nothing really changes. But if one good becomes cheaper than others, people buy more of it.
Example
The Green Revolution produced large foodgrain surpluses. Foodgrain prices fell compared with the prices of other goods. This helped low-income groups, who spend a large share of their income on food.
Don't confuse with
- Absolute (money) price: the rupee price of a good on its own, such as ₹40 per kg of wheat. A relative price compares that rupee price with the prices of other goods.
Related concepts
- Market equilibrium
- Equilibrium price
- Equilibrium quantity
- Excess supply
- Invisible hand
- Market forces
- General equilibrium