Price Level in Economics: Definition & Equation

An error occurred trying to load this video.

Try refreshing the page, or contact customer support.

Coming up next: Price Stability in Monetary Policy: Definition & Overview

You're on a roll. Keep up the good work!

Take Quiz Watch Next Lesson
 Replay
Your next lesson will play in 10 seconds
  • 0:03 Price Level Defined
  • 1:10 Changes to the Price Level
  • 1:30 Measuring Price Level
  • 2:21 Price Level Equation
  • 3:44 Lesson Summary
Save Save Save

Want to watch this again later?

Log in or sign up to add this lesson to a Custom Course.

Log in or Sign up

Timeline
Autoplay
Autoplay
Speed Speed

Recommended Lessons and Courses for You

Lesson Transcript
Instructor: Brianna Whiting

Brianna has a masters of education in educational leadership, a DBA business management, and a BS in animal science.

In this lesson, we'll learn about price level in economics. We'll define the term, learn how it changes, determine a popular way to measure it, and then learn how to calculate it.

Price Level Defined

Most of us are familiar with how a camera works. When we want to capture a particular moment so that we don't forget it, we immediately pull out our cell phones or cameras and snap a few shots. We've all done this at one time or another. Perhaps it was when our child reached a milestone, or we were reunited with a loved one we haven't seen in many years, or we were on vacation and saw a historical landmark.

Whatever the occasion, a camera has been the go-to source to preserve memories for years to come. But, what if we needed to visualize how the economy was performing at a particular time? Would a camera be efficient in documenting this kind of information? Probably not, but thankfully, economists have developed what we call a price level, which works in a similar fashion.

A price level is the measurement of current prices of goods and services produced in the economy in a specific region or country at a specific time. In simpler terms, price level can be compared to a picture we take with our cameras, only the picture is 'hypothetical' and is of the price of goods or services in a particular time frame. This picture allows economists to monitor changes to the price level.

Changes to the Price Level

In order to understand how to calculate price level, we need to explain situations that affect it. The first thing you need to know is that the price level can change. These changes are related to inflation and deflation. Inflation refers to an increase in the price level of goods, whereas deflation describes a decrease in the price level of goods.

Measuring Price Level

Perhaps the most popular way to measure price level is utilizing the consumer price index (CPI), which is an estimate of how common goods and services that consumers purchase change in price. You may be asking yourself right now, how are the prices of goods measured? Well, first of all, the government decides what goods and services are frequently purchased by average consumers and compiles a list. Since the list contains things a consumer would purchase, it is given the name consumer price index. Items range anywhere from bananas and crackers to a stove to a TV and even an amusement park ticket. However, the CPI doesn't include investments, like stocks or life insurance. The government then determines the price for every item on the list and calculates what the total cost would be for those items, known as the price level.

To unlock this lesson you must be a Study.com Member.
Create your account

Register to view this lesson

Are you a student or a teacher?

Unlock Your Education

See for yourself why 30 million people use Study.com

Become a Study.com member and start learning now.
Become a Member  Back
What teachers are saying about Study.com
Try it risk-free for 30 days

Earning College Credit

Did you know… We have over 200 college courses that prepare you to earn credit by exam that is accepted by over 1,500 colleges and universities. You can test out of the first two years of college and save thousands off your degree. Anyone can earn credit-by-exam regardless of age or education level.

To learn more, visit our Earning Credit Page

Transferring credit to the school of your choice

Not sure what college you want to attend yet? Study.com has thousands of articles about every imaginable degree, area of study and career path that can help you find the school that's right for you.

Create an account to start this course today
Try it risk-free for 30 days!
Create an account
Support