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Explain any FOUR Factors which affect the Fixation of Price of a Product.

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”Price refers to the Amount of Money which the Customer Pays for the Product or Service He Purchases” . 

Following are the main factors affecting Price determination : 

  • Product Cost : The most important factor affecting the price of a product is its cost . Product cost refers to the total of fixed costs, variable costs and semi variable costs incurred during the production, distribution and selling of the product. Fixed costs are those costs which remain fixed at all the levels of production or sales. E.g. Rent of Building, Salary etc. Variable costs refer to the costs which are directly related to the levels of production or sales. For example, costs of raw material, labour costs etc. Semi variable costs are those which change with the level of activity but not in direct proportion. For example, fixed salary of Rs.12,000 + upto 6% graded commission on increase in volume of sales. The price for a commodity is determined on the basis of the total cost. Sometimes, while entering a new market or launching a new product , business firm has to keep its price below the cost level but in the long run, it is necessary for a firm to cover more than its total cost if it wants to survive admit cutthroat competition.
  • The Utility and Demand : Usually, consumers demand more units of a product when its price is low and vice versa. However, when the demand for a product is elastic, little variation in the price may result in large changes in quantity demanded. In case of inelastic demand, a change in the prices does not affect the demand significantly. Thus, a firm can charge higher profits in case of inelastic demand. Moreover, the buyer is ready to pay up to that point where he perceives utility from product to be at least equal to price paid. Thus, both utility and demand for a product affect its price. 
  • Government and Legal Regulations : The firms which have monopoly in the market, usually charge high price for their products. In other to protect the interest of the public, the government intervenes and regulates the prices of the commodities for this purpose, it declares some products as essential products for example, Life saving drugs etc. 
  • Marketing Methods Used : The various marketing methods such as distribution system, quality of salesman, advertising, type of packaging, customer services, etc. also affect the price of a product. For example, a firm will charge high price if it is using expensive material for packing its product.

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