Price Determination and Its Economic Factors | Free Essay Example

Price Determination and Its Economic Factors

Words: 1649
Topic: Business & Economics
Updated:

Main economic factors that determine price of good or service

According to Connor (2006, p. 64), price determination is dependent on demand and supply of goods and services. In economics, price depends on the balance between these two forces. However, there are also other several micro-economic factors that determine the price of goods or services in the market. These includes; product quality, change in taste and preference of the consumer, consumer income, and taxation amongst other factors. Quality is a factor that is evident in the product itself. Therefore, quality together with realistic price provides an affirmative economic development of the company producing the high-quality product. High quality products and services offered by a firm will lead to an increase in the demand resulting into relatively higher prices for such goods and services (Boyes & Melvin 2009, p. 47). For instance, medical practitioners in the commencement of their medical practice normally do not overprice their services. However, after some time they gain experience and magnify their clientele base and increase their service charges significantly.

The income of consumers is one of the major factors that determine the demand for particular goods and services. The amount of money to spend increases with increase in the income of consumers, and this in turn causes variation in the consumption pattern. Demand for average commodities and services increases when the income of consumers increases, but decline is experienced with decrease in income. Taxes also have substantial impact on the demand. Besides, influencing the income of consumers, whenever governments imposes tax on a particular product, most corporations find it challenging to produce the product as fast for an equivalent cost. This results into decline in the supply of goods or services. According to the law of demand and supply, if the supply decreases obviously there will be an increase in the price. This principle also holds true the other way round. The other factor that determines price is the taste and preference of the consumers. It affects price because it influences the demand for a particular good or service. For instance, if an individual who once loved coffee changes his preference to chocolate, the demand for latter increases and former decreases (Peng 2011, p. 828).

Pricing mechanism balances demand and supply in the property market. It also allows room for commodity price decisions. The pricing decision is done in line with the current economic provisions and market trends to avoid losses and poor market forces. Economically, there is always price variation depending on the kind or type of commodity to be sold. In any decision-making regarding the property market, price mechanism has to be considered to be the determinant of sales (Hamilton & Zhang 2009, p. 44). The higher the price the lower the purchase rate and vice versa. According to marketing research statistics taken in the last five years, the role of pricing mechanism in the property market is to balance purchase and selling rates. It also ensures that interest incurred by the seller or property owner are considerable. Below is an example graph showing balance in supply and demand in relation to pricing.

Main economic factors that determine price of good or service
Fig.1. Main economic factors that determine price of good or service

Other economic factors that determine the prices of goods and services incorporate non-market environment of a business such as legal, social, and political arrangements. These factors can construct different interactions externally to the business environment but in connection to the markets as well as contracts (Kew & Stredwick 2010). The major sources of non-market concerns include: The moral concerns, change of institutions, activities of different interest groups, new understandings as well as the technological advancement and scientific discoveries in regard to goods and services Informal economic norms and regulations in collaboration with the other competition forces often limit or improve the aspects of pricing within the market (Griffin & Moorehead 2012).

However, these regulatory issues vary considerably across different countries. In most cases, regulations and their enforcements are never fixed but are being determined, understood, and executed by various governing bodies, agencies for governments, judicial institutions, different private organizations like public sentiment, activist groups and even media. Generally, the evolution of procedures and their executions is not exogenous but a consequence of interactions of a number of interests and investors who have prevailing institutions. For a business to set viable pricing strategies on its commodities, it needs to appreciate how these regulations influence its successes and failures. Therefore a business should expect and in some cases try to make alterations in their non-market environment.

Economic factors that have led to rise in the prices of cereals in the past five years

The market prices for the main food products such as corn, wheat and soya beans have risen tremendously in the past five years. There are several factors that could be attributed to this (Campbell & Netzer 2009, p. 307). Some causes indicate a slower progress in production and a faster increase in demand that have led to a constriction of world balances of supply of grains in the past five years. Another factor that could result into this rise is the recent increased international demand for biofuels, feed stocks as well as adverse weather conditions that was experienced between 2006 and 2007 in the main grain producing regions (Irvin 2008). As a consequence of the increase in the usage of corn as raw material for the production biofuel, its cost as a food material increases. This mirrors its significance as a blending constituent for gasoline, and consequently oil price. Not until the last decade was there a close connection between these two price series. The major relationship was that present farming is energy intensive for equipment operation, and certain kinds of fertilizers, especially nitrogenous fertilizers, depends on natural gas as an input in their manufacture. Therefore, oil as well as energy costs as an input to some extent impacted the pricing and the returns of corn farming (Phillips & Gully 2012, p.107).

Other economic features that have added to increase in the prices of corn, wheat and soya beans include; the declining worth of the U.S dollar in the world market, increasing costs of energy, rising farming production costs, upsurge in the foreign exchange assets by the main food-importing nations, and strategies implemented lately by certain exporting and importing nations to alleviate their own food price increases. As a consequence of these market influences, available stocks of grains worldwide have decreased to levels that lead to international aggregate stock-to-use ratio for grains lowest over the past five years (Boeri & Ours 2008). Particularly, stocks in the main exporting nations have declined, resulting into higher prices of the grains worldwide. Due to economic inequality, some individuals have not been able to afford cereals. Eventually, this has led to poor purchasing trends among the concerned societies.

The world’s economic crisis that started in 2007 has also contributed to the rice in the price of cereals in many countries. This is in regard to the aspects of inflation that emerged from such economic crisis. In an economy, inflation is the increase in the price levels of commodities. The level of inflation in a country has both direct and indirect influences on the price of various commodities and economic development of that particular country. Positive changes in the economic development entail an improvement in the standards of living of people from that particular region. Inflation often leads to slowed or negative economic development (OECD 2011).

The causes of inflation are divided into two categories: causes from the demand side of the economy and those from the supply side. From the supply side of the economy, central banks offer substantial financial backing to failing financial institutions within a country to avoid further extortion of the economy and recapture the public confidence. Another prominent move evident in this context is the manipulation of the capital reserve requirements. In banks, capital reserve is the available securities, which can be lent to other financial institutions for dissemination to the public. In this regard (in the past 5 years), central banks tried to regulate their capital reserves to ensure that the money that is in circulation is enough to normalise the situation. Secondly, there was a need to boost people’s power to purchase and stabilize the price of commodities including cereals. Others include reduced savings, reduced direct taxes, positive change in population growth, and excess of illegal money in the economy. All these are factors that increase the amount of money in circulation in any economy leading to higher commodity prices (Equalities Review 2007).

Factors that could lead to inflation from the demand side of the economy (hence increase in cereal prices) are those that negatively impact on supply levels. For instance, in Keynesian economics, a substantial rise in prices occurring when the demand for goods and services surpasses supply causes a critical demand-pull and inflation. In most countries, the same demand-pull inflation occurs for the entire economy. Others include the laws of lessening proceeds, hoarding effects from consumers and the traders, and the influences of natural tragedies. All these factors have the effect of increasing the initial price of commodities consequently resulting in inflation and higher cereal prices (Nelson, 2007).

Governments have instituted different measures to counter the causes of inflation. This occurs through different governmental bodies especially those that regulate the exports, imports and the monetary circulations. Central banks are charged with the responsibility of controlling the level of inflation through various monetary policies. They consistently evaluate the current position of the economy and institute the relative policies that ensure the level of pricing for the different commodities (including cereals) remains steady. For instance, in response to the recent financial crisis, financial bodies tried to regulate the monetary policies by controlling the credit and monetary conditions in the economy in search for utmost employment, steady pricing provisions, and modest long-term interest rates. Evidently, the public usually feel the pinch of financial crisis through these factors.

List of References

Boeri, T & Ours, J 2008, The economics of imperfect labor markets, Princeton Univ. Press, Hoboken, NJ.

Boyes, J & Melvin, M 2009, Economics, Cengage learning, Eagan, MN.

Campbell, D & Netzer, A 2009, International joint ventures, Kluwer Law International, London, UK.

Connor, M 2006, Global price fixing, SPRINGER, Berlin.

Ding, Z 2009, Corporate governance and financial reform in China’s transition economy, Hong Kong University Press, Hong Kong.

Edwards, P & Wajcman, J 2005, The Politics of Working Life, Oxford University Press, Oxford, UK.

Equalities Review 2007, Fairness and Freedom: The Final Report of the Equalities Review: A Summary. Web.

Eubanks, W 2011, Status of the Basel III Capital Adequacy Accord, DIANE Publishing, New York, NY.

Goos, M & Manning, A 2007, ‘Lousy and lovely jobs: the rising polarisation of work in Britain’, Review of Economics and Statistics, Vol. 89, no. 1, pp. 118-133.

Gregoriou, G 2009, Operational risk toward Basel III: Best practices and issues in modeling, management and regulation, Wiley, Hoboken, NJ.

Griffin, R & Moorehead, G 2012, Organizational behavior: managing people and organizations, South-Western/Cengage Learning, Mason, OH.

Hamilton, S & Zhang, J 2009, Doing business in China: avoiding the pitfalls, Palgrave Macmillan, London, UK.

Hellriegel, D., Slocum, J & Woodman, R 2001, Organizational behavior, South-Western College Publ., Cincinnati, OH.

Hitt, M., Miller, C & Collela, A 2008, Organizational behaviour: a strategic approach, Wiley, Hoboken, NJ.

International Labour Office 2011, Strategy for gender mainstreaming in the Employment Sector, 2010-2015: aligned with ILO action plan for gender equality, 2010-2015, Phase I: Programme and Budget, 2010-2011, ILO Press, Geneva, Switzerland.

Ireland, D & Hoskisson, E 2008, Strategic management: competitiveness and globalization, South-Western, Mason, OH.

Irvin, G 2008, Super rich: The rise of inequality in Britain and the United States, Polity Press, Cambridge, US.

Kahanec, M & Zimmermann, K 2010, EU labor markets after post-enlargement migration, Springer Verlag, Heidelberg, Germany.

Kew, J & Stredwick, J 2010, HumanResource Management in a business context, CIPD, London, UK.

Luthans, F 2008, Organizational behavior, McGraw-Hill/Irwin, Boston, MA.

Marshall, C & Marx, M 2012, The economics of collusion: cartels and bidding rings, Mit Press, Cambridge, MA.

Motta, M 2007, Competition policy: theory and practice, Cambridge univ. press, Cambridge.

Nelson, D 2007, Positive organizational behavior, SAGE, London, UK.

OECD 2011, England, United Kingdom, OECD, Paris, France.

Peng, M 2011, Global business, South-Western, Cengage Learning, Mason.

Phillips, J & Gully, M 2012. Organizational behavior: tools for success, South-Western Cengage Learning, Mason, OH.

Prasad, E 2002, Wage inequality in the United Kingdom, 1975 – 99, IMF, Washington, DC, US.

Shimer, R 2010, Labor markets and business cycles, Princeton Univ. Press, Hoboken.

Smith, D 2003, UK current economic policy, Heinemann Educational Books, Oxford, UK.

Welch, J & Welch, F 2009, Economics: Theory and practice, Wiley, Hoboken, NJ.

Wittenbrink, A 2011, Financial regulation through new liquidity standards and implications for institutional banks: Basel III, GRIN Verlag, London, UK.