The nature of the price and characteristics of its formation

The nature of the price and characteristics of its formation

By: Gulomov Samir

The price of a product is generally determined by the cost of production and the level of demand for it. Prices are linked to basic economic principles such as supply and demand, competition, market structure, pricing strategies and costs.

In economics, supply and demand determines the equilibrium price of a good or service based on its availability versus the amount people are willing to pay for it. Market structure often refers to the number of companies in a given industry, their size, distribution channels and legal obligations which may affect pricing strategies. Pricing strategies take into account environmental factors such as location, customer preferences and competitor pricing when forming prices. Costs refer to both direct and indirect costs such as production costs (labor, raw materials) and overhead expenses (rent, insurance).

Prices can also be affected by external forces beyond the control of individual companies like government regulations and taxes which may influence a business’ ability to set competitive prices or even stay afloat in certain industries. Inflation has been cited as one of the major drivers behind changing prices over time due to increased labor costs and currency fluctuations; while decreased customer confidence amidst economic uncertainty can also play a role in sharp price drops experienced in financial markets.

The price is a key part of the marketing mix. It is the amount of money that a customer has to pay for a good or service. Prices are set in order to cover costs and generate a profit. The main factors involved in pricing decisions include: Market Forces - Demand and Supply, Cost of Production, Competition, Profit Target, Branding and Image, Consumer Buying Habits, Quality of the Product etc.

The structure of price formation should consider: - Market research to determine consumer willingness to pay - Establishing cost base (including knowing production cost, operating costs etc) - Competitive analysis - Analyzing legal perspective - Deciding pricing strategy (like penetration/skimming or cost/value based) - Setting viable profit targets - Selecting proper discount policy if any - assessing potential reactions from customers, competitors and middlemen