Theory of Price: How Prices Are Set in Australia (2025 Guide)

Price is everywhere—on supermarket shelves, housing auctions, share markets, and even in the cost of your morning coffee. But how are these prices decided? The theory of price explains the forces that set prices in an economy, guiding everything from household budgets to the Reserve Bank’s policy decisions. In 2025, as Australia faces rising living costs and global economic shifts, understanding how prices are set is more important than ever.

How the Theory of Price Works

At its core, the theory of price is about the intersection of supply and demand. When buyers want more of something (demand rises) and there’s not enough to go around (supply falls), prices go up. When there’s too much of a product and not enough buyers, prices fall. This is the basic market mechanism that underpins the Australian economy.

• Demand: How much consumers are willing and able to pay for a good or service.

• Supply: How much producers are willing and able to offer at different price points.

Prices act as signals—high prices tell producers to make more, while low prices tell consumers to buy more. It’s a constant balancing act that keeps markets moving.

Price Theory in Action: Real-World Examples from Australia

Let’s look at how price theory plays out in the Australian context in 2025:

• Rental Market: In Sydney and Melbourne, surging demand and limited housing supply have pushed rental prices to record highs. According to CoreLogic data, median weekly rents in inner Sydney rose over 10% in the past year. This price spike signals a supply shortage, driving calls for more construction and policy reform.

• Energy Prices: With ongoing global energy uncertainty and the shift toward renewables, wholesale electricity prices have fluctuated sharply. The Australian Energy Market Operator (AEMO) reports that 2025 has seen average wholesale prices above $120/MWh in some regions, reflecting both supply constraints and changing consumer demand for cleaner energy.

• Supermarket Staples: Food prices continue to climb as climate events disrupt supply chains and global demand for Australian exports grows. For example, the price of bananas soared above $5/kg after cyclone damage in Queensland—a classic case of short-term supply shocks affecting price.

Policy Updates and Price Controls in 2025

While free markets set most prices, governments sometimes intervene. In 2025, the Albanese government has:

• Extended the Energy Bill Relief Fund to help households cope with high power prices, effectively capping some retail prices.

• Launched new housing affordability initiatives aimed at increasing supply and stabilising rents.

• Maintained GST exemptions on basic food items to keep staple prices lower for families.

Regulatory bodies like the Australian Competition and Consumer Commission (ACCC) also monitor markets for anti-competitive behaviour that could distort prices.

Why Price Theory Matters for Your Wallet

Understanding price theory helps you navigate:

• When to buy or sell assets (property, shares, even groceries)

• Budgeting for inflation and making sense of rising bills

• Spotting value—knowing when a price is fair or over-inflated

For investors, knowing how prices move in response to news or policy changes can help you make smarter portfolio decisions. For businesses, understanding price signals helps you set competitive pricing and manage supply risks.

Conclusion: Price Signals Are Everywhere

The theory of price isn’t just for economists—it’s a practical toolkit for every Australian household and business. As cost-of-living pressures and market volatility persist in 2025, understanding how prices are set gives you the power to make better financial decisions. Stay informed, watch the signals, and use price theory to your advantage in the year ahead.