The price prevailing in the market at any given time and determined by the forces of demand and supply is the market price. Market price is important because price changes send signals to producers which tells them whether they should produce more or less of their good or service. If the price of a product is raising this is a sign that producers need to supply more.
Producers will respond to this signal because, in general, higher rives lead to higher rewards for producers (profit) and so they have an incentive to work harder and increase production. Filling pries, on the other hand,. hand generally lead to falling profits and this is the way that the market signals to producers that they should produce less.
The influence of price on demand: The price of a good or service is obviously one of the main factors that influence how much we buy of it. The factors that cause the level of demand to change are explained below. The general rule is:
- An increase in demand leads to arise in price
- A decrease in demand leads to a fall in price
Changes in income: Most people gain an income from working in the form of wages and salaries. However, people con gain an income from a number of other sources. They might be from employment, savings, retirement pension, state benefits, property ownership, share ownership or business. It is cleat that the greater the level of people’s income the greater the level of demand. It also follows from this that higher the level of demand the higher the market price. Obviously this logic can also be applied the other way around- lower incomes lead to lower demand and lower price.
The price and availability of credit: The price of some goods and service that people wish to buy can often be so high that they find it difficult to afford them out of one month’s income.
The influence of price on supply: The price of a good or service is obviously one of the main factors that influence how much we buy of it. The general rule is that:
- The higher the price of a good or service the more businesses will want to produce
- The lower the price of a good or service the less businesses will want to produce
The factors that cause the level of supply to change. to change. and hence the market price of goods and services to alter, are explained below.
- An increase in supply leads to a fall in price
- A decrease in supply leads to a rise a in rise in price
Changes in the cost of production: A rise in business costs will often lead to a fall in profit levels and so firms will lose some of their incentive to produce. It the majority of firms in the industry are affected in the same way then there will be a fall in supply. Similarly a fall in business costs tends to increase profit levels and they have an incentive to produce more. If most firms in the industry respond in the same way then there will be an increase in supply.
Factors to consider when setting prices
Before setting price, the company must decide on its strategy for the product. If the company has selected its target market and positioning carefully, then its marketing-mix strategy, including price, will be fairly straightforward. At the same time, the company may seek additional objectives. The clearer a firm is about its objectives, the easier it is to set price. Price is only one of the marketing- mix tools that a company uses to achieve its marketing objectives. Price decisions must be coordinated with product design, distribution, and promotion decisions to from a consistent and effective marketing program.