Price

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Price, one of the basic economic category, is related to financial and production economics. Price is a value of product or service presented in money units (A. Panasiuk 2006, s. 126).

Traditionally, the term “price” is defined as a financial expression of the product value. However, nowadays price is described as a market value of goods or services but regardless of utility value, the price level depends on current market situation which is result of interaction between seller and customer (P. Kotler 1999, s. 11).

Prices influences on producer and consumer decisions on the market. On the one hand, higher prices cause decrease of purchases and production raise, and on the other hand, lower prices cause consumption and decrease of production. Prices are the driving wheel of market mechanism (P. Samuelson, D. William, E. Nordhaus 1995, s. 60).

Functions

The price functions (T. Wojciechowski 2011, s. 68):

  • redistributive function – allows to income reallocation between social groups,
  • stimulating function – imposes obeying the market regulations and helps to regulate supply and demand,
  • informative function – informs about relations of products value.

Price formation

The price formation can be influenced by many different factors (T. Wojciechowski 2011, s. 67-68):

  • production cost and expenses connected with distribution or promotion,
  • competitors’ price of similar products,
  • buying habits and customer perception of product quality and attractiveness,
  • economic condition: inflation, unemployment rate and related work expenses, etc.,
  • laws and regulations which might impact on some product groups and periodically restrict their price formation,
  • supply and demand, lack of efficient supply leads to raise of price and gross margin; demand limitation to supply causes price and gross margin decline.

References

Author: Justyna Michalik