Question:
Explain the following factors affecting the price determination of a product :
(i) The utility and demand
(ii) Extent of competition in the market
Explain the following factors affecting the price determination of a product :
(i) The utility and demand
(ii) Extent of competition in the market
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Utility and demand set the highest price a buyer will pay. Competition limits how high a firm can fix its price.
Updated On: Oct 26, 2026
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Solution and Explanation
Step 1: Introduction:
The price of a product is not fixed at random. Many factors decide it.
Two of them are explained below.
Step 2: Factor (i): The utility and demand:
Utility is the usefulness a buyer feels in the product. Demand is how strongly buyers want it.
A buyer will pay up to the point where the utility is at least equal to the price paid. So utility and demand set the upper limit of price.
When demand is strong, the firm can charge more. When demand is weak, buyers purchase fewer units unless the price is lowered.
Step 3: Factor (ii): Extent of competition in the market:
The number of sellers and the nature of their products decide how free a firm is to set its price.
If there are many sellers with similar goods, a firm must keep its price close to that of the rivals.
If a firm is the only seller or its product is unique, it can fix a higher price.
So stiff competition pulls the price down and low competition allows a higher price.
Final Answer:
Utility and demand fix the highest price that buyers will bear, and the extent of competition decides how much freedom the firm has within that limit.
The price of a product is not fixed at random. Many factors decide it.
Two of them are explained below.
Step 2: Factor (i): The utility and demand:
Utility is the usefulness a buyer feels in the product. Demand is how strongly buyers want it.
A buyer will pay up to the point where the utility is at least equal to the price paid. So utility and demand set the upper limit of price.
When demand is strong, the firm can charge more. When demand is weak, buyers purchase fewer units unless the price is lowered.
Step 3: Factor (ii): Extent of competition in the market:
The number of sellers and the nature of their products decide how free a firm is to set its price.
If there are many sellers with similar goods, a firm must keep its price close to that of the rivals.
If a firm is the only seller or its product is unique, it can fix a higher price.
So stiff competition pulls the price down and low competition allows a higher price.
Final Answer:
Utility and demand fix the highest price that buyers will bear, and the extent of competition decides how much freedom the firm has within that limit.
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