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Law of One Price
The Law of One Price is an economic principle stating that in an efficient market, identical goods or assets will trade at the same price when expressed in a common currency, assuming no transaction costs, tariffs, or other trade barriers. Any deviation from this single price would create a risk-free profit opportunity through arbitrage, where traders could buy the good at the lower price and sell it at the higher price, a process that would continue until the prices converge.
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Economics
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Introduction to Microeconomics Course
The Economy 2.0 Microeconomics @ CORE Econ
CORE Econ
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Imagine a market for coffee beans is in a state of balance where the amount buyers want to purchase is exactly equal to the amount sellers want to sell at the current price. A sudden, unexpected widespread drought occurs in the world's primary coffee-growing regions, damaging a significant portion of the crop. Assuming no other changes, what is the most likely immediate impact on the price and quantity in the coffee bean market?
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In a market where the current price is higher than the equilibrium price, a seller could increase their individual profit by unilaterally offering to sell their product at a price slightly below the current market price but still above their minimum willingness to accept.
A market for a specific brand of headphones is initially in a stable state where the quantity buyers want is equal to the quantity sellers offer. Suddenly, a popular tech influencer releases a negative review of the headphones, causing many potential buyers to lose interest. Arrange the following events in the logical sequence that describes how the market adjusts to a new point of balance.
The Self-Correcting Nature of Markets
Consider the following market schedule for a hypothetical product. The market-clearing price, where the quantity buyers wish to purchase exactly equals the quantity sellers wish to sell, is $____.
Price Quantity Demanded Quantity Supplied $1 50 10 $2 40 20 $3 30 30 $4 20 40 $5 10 50 In a perfectly competitive market for corn, the price has settled at an equilibrium of $4 per bushel, where the quantity supplied by all farmers exactly equals the quantity demanded by all buyers. Consider a single farmer in this market. Why would this farmer have no incentive to unilaterally raise their price to $4.25 per bushel?
In a large city, the market for one-bedroom apartments is in a state of balance: the number of available apartments matches the number of people seeking to rent them at the current average price. A city official proposes a new law that sets a maximum legal price for these apartments, 20% below the current average. The official claims this will make housing more accessible for everyone who wants an apartment. Based on the principles of market balance, which statement best evaluates the likely result of this price ceiling?
Law of One Price
Edward Chamberlin's Foundational Market Experiments
Exogenous Supply Shock
Equilibrium Price
Supply and Demand Diagram for the Second-Hand Book Market
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A specific model of a laptop computer sells for $1,200 in New York and for €1,000 in Berlin. The current exchange rate is $1.25 per €1.00. Assuming there are no transaction costs, shipping fees, or trade barriers, which of the following statements accurately analyzes this market situation?
Arbitrage Opportunity in the Coffee Market
Real-World Price Discrepancies
The Enforcement Mechanism of Price Convergence
The Law of One Price states that an identical product will sell for the same price in different locations, even when significant transportation costs and trade barriers exist between them.
Match each economic term with the description that best fits its role in the context of price equalization across different markets.
A specific brand of smartphone is discovered to be selling for a lower price in Country A than in Country B, after converting both prices to a common currency and accounting for all costs. Arrange the following events in the logical sequence that describes how the market would react to this price difference, eventually leading to price convergence.
The process of simultaneously buying a good at a low price in one market and selling it at a higher price in another to profit from the price discrepancy is known as ____. This action is the key mechanism that causes prices for the same good to converge across different locations.
Applicability of Price Convergence
Suppose the price of a standardized gold bar, when expressed in a common currency, is significantly lower in Zurich than in Mumbai. Assuming no trade barriers, transaction costs, or transportation issues, what is the most likely immediate outcome of this situation in the two markets?