Contact Us

If you still have questions or prefer to get help directly from an agent, please submit a request.
We’ll get back to you as soon as possible.

Please fill out the contact form below and we will reply as soon as possible.

  • Courses
  • Home
  • Economics, Finance, & Analytics
  • Economic Analysis & Monetary Policy

Law of One Price - Explained

What is the Law of One Price?

Written by Jason Gordon

Updated at April 25th, 2022

Contact Us

If you still have questions or prefer to get help directly from an agent, please submit a request.
We’ll get back to you as soon as possible.

Please fill out the contact form below and we will reply as soon as possible.

  • Marketing, Advertising, Sales & PR
    Principles of Marketing Sales Advertising Public Relations SEO, Social Media, Direct Marketing
  • Accounting, Taxation, and Reporting
    Managerial & Financial Accounting & Reporting Business Taxation
  • Professionalism & Career Development
  • Law, Transactions, & Risk Management
    Government, Legal System, Administrative Law, & Constitutional Law Legal Disputes - Civil & Criminal Law Agency Law HR, Employment, Labor, & Discrimination Business Entities, Corporate Governance & Ownership Business Transactions, Antitrust, & Securities Law Real Estate, Personal, & Intellectual Property Commercial Law: Contract, Payments, Security Interests, & Bankruptcy Consumer Protection Insurance & Risk Management Immigration Law Environmental Protection Law Inheritance, Estates, and Trusts
  • Business Management & Operations
    Operations, Project, & Supply Chain Management Strategy, Entrepreneurship, & Innovation Business Ethics & Social Responsibility Global Business, International Law & Relations Business Communications & Negotiation Management, Leadership, & Organizational Behavior
  • Economics, Finance, & Analytics
    Economic Analysis & Monetary Policy Research, Quantitative Analysis, & Decision Science Investments, Trading, and Financial Markets Banking, Lending, and Credit Industry Business Finance, Personal Finance, and Valuation Principles
  • Courses
+ More

Table of Contents

What is the Law of One Price?How does the Law of One Price Occur?Academic Research on the Law of One Price

What is the Law of One Price?

The Law of One Price is an economic theory that addresses the cost of identical goods in separate markets. It rests upon the idea that specific factors cause price disparities across markets.

Back to:ECONOMIC ANALYSIS & MONETARY POLICY

How does the Law of One Price Occur?

The law states that identical goods being sold in different markets at the same time will sell for the same price if the following conditions are present:

  • Fair and Open Competition (forces of supply and demand are in effect and constant);
  • No Trade Frictions (such as tariffs, transportation fees, or transaction costs);
  • The Price is able to fluctuate freely (there is no ability for buyers or sellers to manipulate prices);
  • The same currency is used for the purchase (with no factors affecting currency valuation across markets).

If these attributes are present, forces of supply and demand will create a homogenous price across markets. It assumes that, if prices vary across markets, individuals will purchase more of the goods in the market at a lower price and sell it in the other market at a higher price. The lower-price market experiences higher demand - pushing up the price at the current level of supply. The higher-priced market experiences increased supply - thus lowering demand and price accordingly. The practice of buying and selling at differing prices across markets is known as "Arbitrage". Eventually, the markets will reach equilibrium and arrive at the same price for the good This theory is the basis for the measure of Purchase Price Parity across markets employing unique currencies. Per this theory, given the presence of the above-mentioned conditions, it should cost the same value in a given marketplace to purchase a good. That is, if two separate currencies are used to purchase the same good at the same time, the amount paid in one currency should represent the exact same value in the other currency. It is important to remember that the law of one price is a theory that rarely materializes in practice - as the required conditions are rarely present. Notably, prices of goods vary in a given market at a particular time. It requires the ability to buy and sell in all markets at the same time to carry out the necessary arbitrage.

Related Topics

  • Purchasing Power Parity (PPP)
  • Relative Purchasing Power Parity
  • Law of One Price
  • Burgernomics
  • Balassa-Samuelson Effect


law of one price

Was this article helpful?

Yes
No

Related Articles

  • Economic Cycle - Explained
  • Social Economics - Explained
  • W-Shaped Recovery (Economics) - Explained



©2011-2021. The Business Professor, LLC.
  • Privacy

  • Questions

Definition by Author

0
0
Expand