1. Cost of the product: Cost of the product includes the cost of producing, distributing and selling the product. The cost sets the floor price at which the product may be sold. The firm aims at earning a margin of profit over and above the costs. Total costs are the sum total of the fixed, variable and semi-variable costs for the specific level of activity.
2. The Utility and Demand: While the product costs set the lower limits of the price, the utility provided by the product and the intensity of demand of the buyer sets the upper limit of the price, which a buyer would be prepared to pay. According to the law of demand, consumers usually purchase more units at a low price than at high price. The price of a product is also affected by the elasticity of demand of the product. If the demand of a product, is inelastic, the firm can fix higher prices and vice versa.
3. Extent of competition in the market: Price is affected by the nature and the degree of competition. If less competition is there in the market, prices can reach the upper limit. Thus, competitors prices and their anticipated reactions must be considered before fixing the price of a product.
4. Government and legal regulations: In order to protect the interest of public against unfair practices in the field of price fixing, Government can intervene and regulate the price of commodities. Government can also declare a product as essential product and regulate its price.