A new scheme on dynamic pricing of electricity in a smart grid is proposed in this research article. Also the consumer's demand behavior and response is analyzed. With the smart grid it is possible to determine and communicate the real time prices of electricity like other market goods and evaluate the variation in demand. Utility can exploit the natural human response that is reduction in demand by increasing the prices. The user consumption behavior has modeled into utility functions as per the concepts in the micro-economics. Thus the electricity consumption of each consumer has optimized such that the aggregate utility function of all consumers is maximized. The proposed algorithm is beneficial for consumers and the utility as shown by the simulation results.