"The price that everyone pays is the amount of money it costs to produce that very last megawatt of power. Imagine most of the power is cheap; maybe it's coming from wind or solar. But the last bit of power needed to meet demand is expensive. That last megawatt sets the price, so everyone ends up paying the expensive price, not the cheap one."
"Once you see 'the last unit sets the price,' you start asking what the last unit is - and what's driving the cost. In a competitive market, the price is whatever it costs to 'clear' your product."
Pricing is often misunderstood, with many believing averages dictate prices. However, the market price is set by the highest-cost marginal customer. In power markets, the last megawatt produced determines the price everyone pays, regardless of cheaper sources. This principle applies to other businesses as well. By identifying the last unit and understanding its cost drivers, businesses can set more effective prices based on scarcity rather than typical user behavior, leading to better pricing strategies.
Read at Entrepreneur
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