Q.What are the factors affecting determination of the price of a product or service? Explain.

The price of a product is not fixed at random -- a marketer must weigh several forces before setting it, because price is the single most important factor affecting a firm's revenue and profits. This CBSE Class 12 Business Studies chapter names six factors that affect price determination.

• Product Cost -- the cost of producing, distributing, and selling the product sets the minimum, or floor, price; it covers fixed, variable, semi-variable, and total costs.
• The Utility and Demand -- the utility a product offers and the intensity of demand set the maximum, or ceiling, price a buyer will pay.
• Extent of Competition in the Market -- where the price settles between the floor and the ceiling depends on the degree of competition and rivals' prices.
• Government and Legal Regulations -- the government can regulate the price of an essential commodity to protect the public. …

Price is the amount of money a buyer pays (or a seller receives) for a product or service. It is an effective competitive weapon and the single most important factor affecting a firm's revenue and profits, so fixing it carefully matters. No product can be launched without at least some guideline for pricing. The chapter explains six factors that a marketer must weigh while fixing a price.

1. Product Cost. Cost is one of the most important factors. It includes the cost of producing, distributing, and selling the product, and it sets the minimum level -- the floor price below which the firm cannot sell in the long run, since it must at least cover all its costs and earn a margin of profit. There are broadly three types of cost: fixed costs (which do not change with the level of activity, such as building rent or a manager's salary), variable costs (which vary in direct proportion to output, such as raw material and power), and semi-variable costs (which vary with activity but not in direct proportion, such as a salesperson's fixed salary plus commission). Total cost is the sum of the fixed, variable, and semi-variable costs for a given level of activity.

2. The Utility and Demand. While cost sets the lower limit, the utility a product provides and the intensity of the buyer's demand set the upper limit -- the ceiling a buyer is prepared to pay. A buyer will pay up to the point where the utility from the product at least equals the sacrifice of the price paid. According to the law of demand, consumers usually buy more at a low price than at a high price, so the price must reflect the interest of both the buyer and the seller.

3. Extent of Competition in the Market. Between the floor and the ceiling, where the price settles depends on the nature and degree of competition. Where competition is limited, the price tends towards the upper limit; under free competition, it tends towards the lowest level. Competitors' prices and their likely reactions, as well as the quality and features of competing products, must be examined before fixing a price.

4. Government and Legal Regulations. To protect the public against unfair price-fixing, the government can intervene and regulate prices. It may declare a product an essential commodity and control its price -- for example, preventing a monopoly manufacturer of an essential drug from charging an excessive amount. …