Price - Term Overview

Home | Blog | Price - Term Overview

Price is the amount required to purchase a good, service, or other objective. This is usually a monetary amount.

For a transaction to occur, the price has to be accepted by buyers and sellers. Therefore, the price is an indicator of the balance between consumers and savers when they buy and sell goods or services.

There is an economic theory that serves to represent this balance between buyers and sellers. It's the so-called law of supply and demand.

Price value

The value of a fair price is very relative. That is why many economists argue that it should not intervene in it.

In planned economies, when you intervene in prices, it's usually done especially in the prices of basic goods. The problem with this is that they can cause a supply crisis and that nobody wants to produce at low prices, leading to a shortage of that good or service.

Likewise, intervention in the money markets encourages inflation and, therefore, this can increase interest rates as well as the cost of financing companies, leading them to reduce staff, mainly due to their tight profit margins. Therefore, the unemployment rate of the economy increases.

On the contrary, in capitalist economies, the price of a good or service can be very high, especially if it's basic goods and services. If the price is high, it's because someone is willing to buy or sell it at that level. However, if there were no one willing to buy or sell that good or service, the price would be corrected until it can reach an optimal level where there is a counterpart. Therefore, it works as a balance where the powers of supply and demand are the drivers and determinants.

When there is freedom of competition, if there is a good or service with a high price, more producers will enter to offer that service. Some of them will reduce the price to gain market share, thus bringing the price to a level acceptable to consumers.

The price is also valued by the needs that people have to consume it and their preferences. The marginal utility is diminishing as goods are consumed regularly because the preferences change. Imagine how much you value a glass of water in the desert. But if you arrive in the city and drink 10 glasses of water, the next one you will not value practically anything.

The price variable is of vital importance to promote exchange and trade, allowing people to develop. Therefore, it's to a certain extent an indicator not only economic, but also social as it measures the welfare state of a population.

Price functions

As we have seen, prices allow the necessary adjustments in supply and demand to take place. Thus, they perform two important functions:

1. Ration goods and services and factors

Prices ensure that resources are distributed efficiently and that a market equilibrium can be reached . If the demand for a good increases or the supply decreases, there will not be enough supply of the good to cover all the demand, so the price will rise. In this way, the demand will be reduced and there will be a market equilibrium again.

Prices will allow buyers to indicate the amount of product they want to buy at each price and entrepreneurs to determine the amount of product they want to sell at each price. If the price increases ( inflation ), companies are encouraged to increase production, since they would make a greater profit and new companies are attracted.

2. Serve as an incentive to entrepreneurs and owners of the factors

Prices allow companies to obtain money with which they can later pay their production costs (purchase of raw materials, payment of employee salaries, logistics, etc.).

Pricing strategies

The most common pricing strategies are based on setting prices lower, higher or equal to market prices, depending on the intention of the company and the image that it wants to convey to consumers.

According to this criterion, the strategies that can be chosen in terms of price are:

- Penetration: With prices below market value, with the aim of creating attraction and stimulating the customer to choose the product. It's very common in newly launched products.
- Alignment: It's the simplest way because the good or service that enters the market does so with a price similar to that of its competitors and within the value that customers give it.
- Selection: In this strategy, a product is offered with a price higher than the market price, and of which consumers have a much higher value. Luxury or exclusive items are often promoted through this type of marketing practice.

Within this basic strategy scheme, companies have the possibility of developing multiple variants when setting their prices. Do not forget that the main purpose of this type of marketing mechanism is to achieve objectives or, in other words, to increase your profit as much as possible.

Read more articles in our blog.
Share on Facebook Share on Twitter Share on LinkedIn
Back to top

Home | Privacy Policy | Terms of Use

Copyright 2011 - 2020 - All Rights Reserved