Question

Answer the following question.
Price of a product in influenced by many factors. Explain any four such factors.

Answer 1

The price of a product is influenced by many factors. Such factors are explained below as:

1. Cost of product -
The cost involved in producing a product sets the basic minimum price for it. This cost comprises of the cost involved in the production, distribution, and sale of the product. The costs of a product can be classified into three categories – namely, fixed costs, variable costs, and semi-variable costs.

• Fixed costs refer to those costs that do not vary with the level of output produced.
• Variable costs refer to those costs that vary in direct proportion with the volume of production. As the volume of production increases, the variable costs also increase.
• Semi-variable costs refer to those costs that vary with the level of output, but not in direct proportion. As the level of output increases, semi-variable costs also increase (but less than the increase in the level of output).

2. Price elasticity of demand for the product -
In case the demand for a product is price elastic, the firm cannot charge a higher price. This is because in such a case, a slight rise in the price would result in a large fall in the demand. As against this, if the demand is price inelastic, then the firm has the privilege of charging a higher price. This is because for such products even at a high price, the demand would not fall much.

3. Degree of competition in the market -
If a firm faces high competition (i.e., if a large number of similar products are available in the market), this suggests that a firm cannot even slightly increase the price of its product.

4. Methods of marketing -
Methods of marketing used by the firm such as distribution, advertisement, customer services, and branding also affect the determination of prices. If a firm incurs a huge cost on the marketing of a product, then it would generally charge a higher price.