What is Price Determination? In Economics Price Determination is the interaction between the demand and supply in the free market that is used to determine the costs for a good or service. Basically Meaning is Interaction of the free market forces of demand and supply to establish the general level of price for a good or service in Market. Also learn, Factors Affecting of Price Determination with Steps and Process.
The Factors Affecting Price Determination of Product
Main factors affecting the price determination of product are:
The most important factor affecting the price of a product is its cost. Product cost refers to the total of fixed costs, variable costs and semi-variable costs incurred during the production, distribution, and selling of the product. Fixed costs are those costs which remain fixed at all the levels of production or sales.
For example, rent of the building, salary, etc. Variable costs refer to the costs which are directly related to the levels of production or sales. For example, costs of raw material, labor costs etc. Semi-variable costs are those which change with the level of activity but not in direct proportion. For example, a fixed salary of Rs 12,000 + up to 6% graded commission on an increase in the volume of sales.
The price of a commodity is determined on the basis of the total cost. So sometimes, while entering a new market or launching a new product, the business firm has to keep its price below the cost level but in the long rim, it is necessary for a firm to cover more than its total cost if it wants to survive amidst cut-throat competition.
Usually, consumers demand more units of a product when its price is low and vice versa. However, when the demand for a product is elastic, little variation in the price may result in large changes in quantity demanded. In the case of inelastic demand, a change in the prices does not affect the demand significantly. Thus, a firm can charge higher profits in the case of inelastic demand. Moreover, the buyer is ready to pay up to that point where he perceives utility from the product to be at least equal to the price paid. Thus, both utility and demand for a product affect its price.
The next important factor affecting the price of a product is the nature and degree of competition in the market. A firm can fix any price for its product if the degree of competition is low. However, when the level of competition is very high, the price of a product is determined on the basis of the price of competitors’ products, their features, and quality etc. For example, the MRF Tyre company cannot fix the prices of its Tyres without considering the prices of Bridgestone Tyre Company, the Goodyear Tyre company etc.
The firms which have the monopoly in the market, usually charge the high price for their products. In order to protect the interest of the public, the government intervenes and regulates the prices of the commodities for this purpose; it declares some products as essential products for example. Life-saving drugs etc.
Another important factor, affecting the price of a product or service is the pricing objectives.
Following are the pricing objectives of any business:
The various marketing methods such as distribution system, quality of salesmen, advertising, type of packaging, customer services, etc. also affect the price of a product. For example, a firm will charge high profit if it is using an expensive material for packing its product.
The Price decision must take into account all factors affecting both demand price and supply price. The Process of Price Determination. The market price is the price determined by the free play of demand and supply. The market price of a product affects the price paid to the factors of production – rent for land, wages for labor, interest for capital and profit for the enterprise. In fact, price becomes a basic regulator of the entire economic system because it influences the allocation of these resources.
The pricing decisions must take into account all factors affecting both demand price and supply price. The price determination process involves the following steps:
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