The Determinants of Factors of Price

Topics: Supply and demand, Tax, Prices of production Pages: 4 (1117 words) Published: March 10, 2009

The importance of price in the modern economic system not be overemphasized. However, to set the right price for any commodity or service, some parameters or determinants come to play. Among the determinants of factoring price are:- • Tender

• Sales by Auction
• Haggling etc, and these are discussed below.

1.Interaction of the forces of Demand and Supply:-
In a perfectly competitive market or what is sometimes referred to as a free market economy, prices are determined by the interaction of the forces of demand and supply. The determination of prices by the interaction of the invisible forces of demand and supply is known as the ‘price mechanism’ or ‘price system’.

From the laws of demand and supply, it is known that the lower the price the greater the quantity demanded, while at higher prices less will be demanded. On the other hand, the higher the price the greater the quantity supplied. But there will be a price at which the quantity demanded equals the quantity supplied. This is known as ‘the equilibrium price’ the equilibrium price is the market price for the commodity.

Changes in demand and supply lead to price changes. Once there is any change in either demand or supply, the initial equilibrium will be disrupted and a new equilibrium will be created.

This is the determination of prices by bargaining between buyers and sellers. Haggling takes place when there is no ruling market price for a commodity, or either the buyer or seller is not aware of the ruling market price of a commodity. Bargaining is very common in West African Countries.

Usually, the buyer will have a price in his mind above which he is not willing to buy the commodity. The buyer’s maximum price depends on his affluence, and his keenness to buy. The seller also has a price in his mind below which he will not be willing to sell. The seller’s minimum price depends on his cost of production...
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