Price Determination

Product Cost

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.

Total Supply

Supply means the quantity offered for sale by producers. Thus the supply of tea does not mean the actual stock of tea; it means the amount of tea which the producers are willing to put on the market at various prices. Every unit of a commodity has a supply price-the price at which it is offered for sale. Other things being equal, a rise in price leads to an increase in the quantity offered for sale,and a fall in price reduces the quantity offered for sale.

Total Demand

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 case of inelastic demand, a change in the prices does not affect the demand significantly. Thus, a firm can charge higher profits in case of inelastic demand. Moreover, the buyer is ready to pay up to that point where he perceives utility from product to be at least equal to price paid. Thus, both utility and demand for a product affect its price.

Government and Legal Regulations

The firms which have monopoly in the market, usually charge 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.

Marketing Methods Used

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 expensive material for packing its product.