Question

Long answer type questions.

What is price? Explain the factors which influence prices of product.

Answer 1

Price refers to the money paid by the customers to obtain a product and this price affects its demand. Thereby, pricing plays an important role in the marketing of goods.
The following are some of the factors that affect the determination of the price of a product or a service.

1. Cost of Product: Cost of the product plays an important role in determining the price. It comprises of cost involved in production, distribution and sale of the product. Generally, the firms decide upon the price keeping in consideration the cost as well as the profit factor.
2. Demand for the Product: While determining the price, a firm must also consider the demand for its product. Herein, the elasticity of demand plays an important role. Elasticity of demand refers to the proportionate change in demand due to a given proportionate change in price. In a case where demand is elastic, the firm cannot charge a higher price as it would lead to a large fall in the demand. On the other hand, if demand is inelastic, a change in price does not affect the demand much. In this case, the firm has the privilege of charging a higher price, as even at a higher price, the demand would not fall much. Thus, price for goods having elastic demand is generally lower than price for goods having inelastic demand.
3. Degree of Competition in the Market: Generally, higher the competition in the market, the lower is the price that a firm can charge for its product. This is because in case of high competition, if a firm attempts to charge a high price, it would lose its customers to the competitors. On the other hand, if a firm faces very little competition for its product then it has the freedom of charging a higher price.
4. Government Regulations: At times to protect the interest of public at large, the government intervenes in the determination of price. For example, in case of essential commodities, the government can declare a maximum price that can be charged.
5. Method of Marketing: Methods of marketing used by the firm such as distribution, advertisement, customer services, branding, etc. also affect the determination of prices. For example, if the firm uses intense advertising for the promotion of the product, then it would charge a higher price.