The law of one price is an economic law stated as: "In an efficient market all identical goods must have only one price." Economics (deriving from the Greek words οίκω [okos], house, and νέμω [nemo], rules hence household management) is the social science that studies the allocation of scarce resources to satisfy unlimited wants. ... In finance, the efficient market hypothesis (EMH) asserts that stock prices are determined by a discounting process such that they equal the discounted value (present value) of expected future cash flows. ... In marketing, a product is anything that can be offered to a market that might satisfy a want or need. ...

The intuition for this law is that all sellers will flock to the highest prevailing price, and all buyers to the lowest current market price. In an efficient market the convergence on one price is instant. Supply has a number of meanings: In economics, supply is the aggregate amount of any material good that can be called into being at a certain price point; it one half of the equation of supply and demand. ... The supply and demand model describes how prices vary as a result of a balance between product availability at each price (supply) and the desires of those with purchasing power at each price (demand). ...

An example: Financial markets

Commodities can be traded on financial markets, where there will be a single offer price, and bid price. Although there is a small spread between these two values the law of one price applies (to each). No trader will sell the commodity at a different price than the market maker's offer-level or buy at a higher price than the market maker's bid-level. In either case moving away from the prevailing price would either leave no takers, or be charity. The word commodity has a different meaning in business than in Marxian political economy. ... In finance, financial markets facilitate: The raising of capital (in the capital markets); The transfer of risk (in the derivatives markets); and International trade (in the currency markets). ... Sale is the name of several places: Sale, Victoria, Australia Sale, Greater Manchester, England Sale, Italy (pronunciation: SAH-leh) - in the province of Alessandria Salè, Morocco Sale Marasino (first pronunciation: SAH-leh), an Italian commune in the province of Brescia Sale is also a type of contract for the exchange... Bid (Medical) (a medical abbreviation commonly seen on prescriptions) Bid price (a financial term) Efforts to get any thing or to get the right to celebrate an event. ... In finance a spread is the difference between the price bid and the price offered on a commodity or security. ... Sell can mean: A verb relating to Sales Sell (professional wrestling) In Investing to give up control of an asset in exchange for a valuable consideration. ... A market maker is a person or a firm which quotes a buy and sell price in a financial instrument or commodity hoping to make a profit on the turn or the bid/offer spread. ... Look up Trade in Wiktionary, the free dictionary Trade centers on the exchange of goods and/or services. ... This article refers to the act of selfless giving, and organizations which facilitate selfless giving. ...

In the derivatives market the law applies to financial instruments which appear different, but which resolve to the same set of cash flows; see Rational pricing. Thus: In mathematics, the derivative of a function is one of the two central concepts of calculus. ... Financial instruments package financial capital in readily tradeable forms - they do not exist outside the context of the financial markets. ... Rational pricing is the assumption in financial economics that asset prices (and hence asset pricing models) will reflect the arbitrage-free price of the asset as any deviation from this price will be arbitraged away. This assumption is useful in pricing fixed income securities, particularly bonds, and is fundamental to...

"a security must have a single price, no matter how that security is created. For example, if an option can be created using two different sets of underlying securities, then the total price for each would be the same or else an arbitrage opportunity would exist." [1]

In economics, arbitrage is the practice of taking advantage of a state of imbalance between two or more markets: a combination of matching deals are struck that exploit the imbalance, the profit being the difference between the market prices. ...

Where the law does not apply

• The Balassa-Samuelson effect gives examples of markets between which the law of one price does not apply.
• The law does not apply intertemporally, so prices for the same item can be different at different times in one market. The application of the law to financial markets in the example above is obscured by the fact that the market maker's prices are continually moving in liquid markets. However, at the moment each trade is executed, the law is in force (it would normally be against exchange rules to break it).

The Balassa-Samuelson effect is either of two related things: The observation that consumer price levels in wealthier countries are systematically higher than in poorer ones (the Penn effect). An economic model predicting the above, based on the assumption that productivity or productivity growth-rates vary more by country in... A market maker is a person or a firm which quotes a buy and sell price in a financial instrument or commodity hoping to make a profit on the turn or the bid/offer spread. ... A liquid will assume the shape of its container. ...

References

• Law of One Price, investorwords.com
• Baye, Michael, John Morgan and Patrick Scholten, "Information, Search, and Price Dispersion," (in Handbook on Economics and Information Systems, T. Hendershott, Ed., Elsevier, forthcoming)
• Nash-Equilibrium.com