Question:
Explain the following factors affecting the determination of price of a product :
(i) Product cost
(ii) The utility and demand
(iii) Extent of competition in the market
Explain the following factors affecting the determination of price of a product :
(i) Product cost
(ii) The utility and demand
(iii) Extent of competition in the market
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Cost sets the minimum price, utility and demand show what buyers will pay, and competition decides how far the firm can move from rival prices.
Updated On: Oct 26, 2026
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Solution and Explanation
Step 1: Why pricing factors matter:
The price of a product is not set at random. Several factors push it up or down.
Three of them are explained below.
Step 2: (i) Product cost:
The cost of producing, distributing and selling the product sets the lower limit of the price.
Costs include fixed cost, variable cost and semi variable cost. In the long run the price must cover all of them.
If the price stays below cost, the firm suffers losses. So cost is a key factor.
Step 3: (ii) The utility and demand:
Utility is the value the buyer finds in the product. Demand is how many units people will buy at a price.
A product with high utility and strong demand can carry a higher price.
The price should also remain below the value the customer sees, otherwise he will not buy.
Step 4: (iii) Extent of competition in the market:
When rivals are few, the firm has more freedom to set a higher price.
When there are many rivals selling similar goods, the firm must keep its price near that of others.
So the number and strength of competitors limits the price.
Final Answer:
Product cost fixes the minimum price, utility and demand set how much buyers will pay, and competition limits how far the price can differ from rivals.
The price of a product is not set at random. Several factors push it up or down.
Three of them are explained below.
Step 2: (i) Product cost:
The cost of producing, distributing and selling the product sets the lower limit of the price.
Costs include fixed cost, variable cost and semi variable cost. In the long run the price must cover all of them.
If the price stays below cost, the firm suffers losses. So cost is a key factor.
Step 3: (ii) The utility and demand:
Utility is the value the buyer finds in the product. Demand is how many units people will buy at a price.
A product with high utility and strong demand can carry a higher price.
The price should also remain below the value the customer sees, otherwise he will not buy.
Step 4: (iii) Extent of competition in the market:
When rivals are few, the firm has more freedom to set a higher price.
When there are many rivals selling similar goods, the firm must keep its price near that of others.
So the number and strength of competitors limits the price.
Final Answer:
Product cost fixes the minimum price, utility and demand set how much buyers will pay, and competition limits how far the price can differ from rivals.
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