In an economy, the determination of prices holds immense importance as it represents the value of goods and services, as well as the worth of factors of production like land, labor, and capital. Essentially, price signifies the amount or weight that can be exchanged for a specific quantity or quality of goods or services.
An overview over this
The determination of prices involves establishing the price of goods and services in the open market. In a free market system, prices are determined by the interaction of supply and demand. The government does not typically interfere in price determination, but there are instances where it may intervene. For instance, the government has set a minimum selling price for wheat.
Factors That Effect Determination of Commodity Prices
The price of a product is greatly influenced by its cost, which encompasses fixed costs, variable costs, and semi-variable costs that arise during production, distribution, and sales. Fixed costs, such as rent and salaries, remain constant regardless of production or sales levels.
Variable costs are costs that are directly linked to the levels of production or sales. These costs include basic material costs, apprentice costs, and so on. Semi-variable costs, on the other hand, are costs that vary with the level of activity but not in a direct proportion.
Demand and Need
Typically, customers tend to request higher quantities of a product when its price is lower and vice versa. Conversely, if the demand for a product is elastic, even a slight change in price can lead to significant fluctuations in the quantity demanded.
When the demand is inelastic, a change in prices does not have a significant impact. Moreover, the buyer is willing to pay up to the point where they feel that the utility derived from the product is at least equal to the price paid.
Competition Extent in the Market
The price of manufactured goods is influenced by the level of competition in the market. If competition is low, a firm has the freedom to set any price for its product. However, in a competitive market, the price is determined by considering the prices of substitute goods.
Authorities and Legalization
The companies that hold a monopoly in the market often impose high prices on their products. To safeguard the public’s interests, the government steps in and controls the prices of essential goods. To achieve this, certain products such as life-saving drugs are identified as indispensable.
The pricing objectives play a significant role in determining the price of a product or service. Profit maximization, market share leadership, competitive survival, and product quality leadership are all objectives that influence pricing decisions. Generally, when a company aims to achieve these objectives, they tend to charge higher prices to account for the associated high quality and cost.
Telecom companies in the region play also an important role in prices for goods. New and affordable telecom or internet services in the region help companies communicate to their customers or other stake holders, this reduce the actual prices of commodities.
Ways of Marketing
The price of manufactured goods is influenced by various marketing methods, including the circulation system, salesmen quality, marketing strategies, packaging type, and customer services. For example, if a company uses high-end materials for packaging its product, it will set a higher price.
Equilibrium of Price
The equilibrium price is the price at which supply and demand are equal. This can be visually represented as the point where the demand curve and supply curve intersect. At this price, there is no excess supply or unfulfilled demand, making it the market clearing price. Achieving stable equilibrium occurs when the equilibrium price and quantity are reached, allowing any disruptions in supply and demand to be restored to their original balance. If the price falls below the equilibrium price, demand increases while supply decreases, resulting in a shortage of goods and eventually driving the price back up to the equilibrium level.
In addition to the forces of demand and supply, various other factors, including the price of substitute goods, price of related goods, government policies, and market competition, also contribute significantly to the determination of prices.