Main economic factors that determine the price of a good of service

According to Marginal Price Theory, profit maximisation is the basic principle by which the producer is guided in determining his prices (van Meerhaeghe, 1969). This paper aims to identify and explain the key economic factors that determine the price of a good or service. The price of a good or service can be loosely defined as the sum total of cost of input materials, overheads and profits. However, in real life pricing tends to be more complex and is closely related to Demand and Supply of the products. The Theory of Price contends that the price for any specific good/service is the relationship between the forces of supply and demand.Supply and demand is perhaps one of the most fundamental concepts of economics and it is the backbone of a market economy. the relationship between price and quantity demanded is known as the demand relationship. Supply represents how much the market can offer. The quantity supplied refers to the amount of a certain good producers are willing to supply when receiving a certain price. The correlation between price and how much of a good or service is supplied to the market is known as the supply relationship. Price, therefore, is a reflection of supply and demand. (Investopedia).

Stages in Product lifecycle :Pricing. The Law of Demand The law of Demand states that all other factors being equal, the quantity of goods or service demanded decreases as its price increases (REFER). The relationship between product price and quantity demanded is known as the demand relationship and it always a negative relationship (Investopedia).

Source: Lowes, 2010

Demand Curve: The Graph shows the price along Y-axis and Quantity along X axis and it shows that when the price changes from P0 to p1 there is a rise in the demand of the quantity (Q1 Q0) demanded for a product or service.

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Determintation of Price : Market Equilibrium Price and Availability of Substitutes If the consumer has a number of options in substitute products, then he tends to go for the cheapest option. Price and Availability of Complements The price and availability of complements can have a significant impact on product sales. If the price of a complement is high, companies will have to offer price incentives on the product for better sales. Consumer s Disposable Income The general well being of the economy is important as this increases the amount of disposable income in hands of consumers. In recessions, companies tend to decrease prices of non essentials to ensure better sales. Consumer Preference Price Expectations Perceived Product Quality Consumers are willing to pay more for products that are supposed to be of a higher quality. Companies tend to cash in on this behaviour to increase prices of products. Consumer Credit Terms (Access to easy credit) Advertising and Promotion Demography

Stocks of the product held by consumers Consumer Surplus and Price Discrimination Companies tend to do price discrimination to extract consumer surplus. So in effect different type of customers end up paying different prices for the same services. Pricing in Monopoly Price of product also gets affected by the type of market the product operates in. If the product is a monopoly, then the supplier can price it at will, knowing that demand will be inelastic to price

 

S es hat all othe factors be by the suppliers also increase



y e al, as price of a good or service increases , the quantity offered

fluctuations. On the other hand in a competitive market, product pricing tend to be close to competing product price.