Question

Explain the following factors affecting 'Price determination':
(i) Product Cost
(ii) The Utility and Demand
(iii) Extent of Competition in the market

Answer 1

Factors Affecting Price Determination

Price of a product is influenced by various factors. Below are some key factors that affect the pricing decisions of a business:

(i) Product Cost:

The total cost incurred in producing, distributing, and selling the product sets the minimum price level. A company must cover its cost to avoid losses. The cost includes fixed costs, variable costs, and semi-variable costs.

Example: If the cost to make a shirt is ₹500, the price must be set above ₹500 to make a profit.

(ii) The Utility and Demand:

The price of a product is directly influenced by the utility it provides to consumers and the level of demand. Higher utility and stronger demand usually allow firms to charge a higher price, and vice versa.

Example: A new smartphone model with advanced features may have high demand and can be priced higher.

(iii) Extent of Competition in the Market:

The number and strength of competitors in the market influence pricing. In highly competitive markets, companies may need to lower prices to attract customers, while in monopoly or less competitive situations, they may enjoy more pricing freedom.

Example: In the airline industry, competitive pricing is common due to multiple service providers.

Conclusion: A firm must consider multiple factors such as cost, demand, and competition to arrive at a fair and profitable price for its products.