Page 4 - Lesson Note 4

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

price, which a buyer would be prepared to pay.

In fact the price must reflect the interest of both the parties to the

transaction—the buyer and the seller.

3. Extent of Competition in the Market:

Between the lower limit and the upper limit where would the price settle

down? This is affected by the nature and the degree of competition.

The price will tend to reach the upper limit in case there is lesser degree of

competition while under conditions of free competition, the price will tend to

be set at the lowest level.

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 declare a product as essential product and regulate its price.

5. Pricing Objectives:

Pricing objectives are another important factor affecting the fixation of the

price of a product or a service. Generally the objective is stated to be

maximizing the profits.

But there is a difference in maximizing profit in the short run and in the long

run. If the firm decides to maximize profits in the short run, it would tend to

charge maximum price for its products.