What is price fixation?
Price fixing is the process of determining the price of a product for sale in market. It is believed that it is rather a kind of agreement between businessmen to buy or sell goods at a price not lesser than a particular price. It is applied for safeguarding their minimum profits by averting competition from rivals who may try to sell at lower prices for their selfish gains.
But, it is not a good practice and governments try to safeguard the interests of consumers by prohibiting unhealthy practices through enforcement of laws and other measures.
Let us now look at how prices of commodities are determined under normal market conditions.
How prices are determined?
Price fixing is the process of determining the price of a product for sale in market. It is believed that it is rather a kind of agreement between businessmen to buy or sell goods at a price not lesser than a particular price. It is applied for safeguarding their minimum profits by averting competition from rivals who may try to sell at lower prices for their selfish gains.
But, it is not a good practice and governments try to safeguard the interests of consumers by prohibiting unhealthy practices through enforcement of laws and other measures.
Let us now look at how prices of commodities are determined under normal market conditions.
How prices are determined?
- Under normal circumstances, in healthy market conditions, prices are determined by the interaction of supply and demand forces.
- Generally, the supplier or manufacturer fixes the price of his product after taking into account all his cost factors and then adding a margin of profit for himself.
- So, the price is fixed at a rate which includes cost + profit.
- But, producers and / or suppliers may try to add a higher percentage of profit to the cost in fixing their prices.
- So, the forces of supply and demand in the market come to our rescue in safeguarding the interests of consumers by settling at an equilibrium point of price.
Major factors influencing price determination
The following are some of the important factors affecting price determination.
Cost of production
Cost of production is the basic element of price. The producer of the product incurs some basic costs towards raw materials and ingredients involved in the production of his products. He further incurs the labour cost, the salaries of staff, rent of the building, any machinery and godowns involved in producing the product and other costs like electricity, stationery and depreciation of assets and tools used in producing the output. So all these elements constitute the cost of his product.
So, the producer or supplier fixes his price by summing up all these costs and dividing that total cost with the quantity that is produced at any period. This average cost should be fully realised by him from the buyers.
Competition in market
Competition in market from similar product dealers also influences the price. If there are many sellers of the same commodity, each one of them will try to maximise his sales by giving incentives to buyers. Buyers generally buy from a dealer who offers the products at comparatively lower prices. Even a small fraction of a currency unit charged lower can allure the buyers. So, the producer or supplier needs to pay attention to this factor of market competition in fixing his prices.
Value of product to the buyer
This is one more important element in fixing the price. The value that buyers attach to the product is a very sensitive part of price. Necessities like food grains, salt, sugar are more important for consumers. So, they cannot live without these products. The producer or supplier can fix the prices with some margins in such products without losing market.
The forces of supply and demand
The forces of demand and supply play major role in price determination. Buyers normally tend to purchase products at reasonably lower prices to get maximum satisfaction. Similarly sellers try to maximise their profits by selling things at higher prices. So, when both these forces interact, the buyers will restrict their purchases when the prices increase and increase their purchases when prices fall. Naturally, when there are no buyers at increased prices, the supplier is forced to decrease his price a little to attract buyers. When price falls the buyers will increase their demand. Similarly, when the prices fall too much, there will be excessive demand for products but the supplier may not have enough supply to meet their demand. Then, buyer will be willing to buy at an higher price. Thereby, the prices will increase. In this way, the price level settles at a point of equilibrium where quantity demanded and quantity supplied matchup. Price gets influenced in this way with the forces of supply and demand.
Government policies
Government can always try to regulate the prices through its policies and laws to safeguard the interests of consumers. So, the producers and sellers have to fix their prices in accordance with those policies and guidelines or else they may have to face legal proceedings and bans.
Cost of production
Cost of production is the basic element of price. The producer of the product incurs some basic costs towards raw materials and ingredients involved in the production of his products. He further incurs the labour cost, the salaries of staff, rent of the building, any machinery and godowns involved in producing the product and other costs like electricity, stationery and depreciation of assets and tools used in producing the output. So all these elements constitute the cost of his product.
So, the producer or supplier fixes his price by summing up all these costs and dividing that total cost with the quantity that is produced at any period. This average cost should be fully realised by him from the buyers.
Competition in market
Competition in market from similar product dealers also influences the price. If there are many sellers of the same commodity, each one of them will try to maximise his sales by giving incentives to buyers. Buyers generally buy from a dealer who offers the products at comparatively lower prices. Even a small fraction of a currency unit charged lower can allure the buyers. So, the producer or supplier needs to pay attention to this factor of market competition in fixing his prices.
Value of product to the buyer
This is one more important element in fixing the price. The value that buyers attach to the product is a very sensitive part of price. Necessities like food grains, salt, sugar are more important for consumers. So, they cannot live without these products. The producer or supplier can fix the prices with some margins in such products without losing market.
The forces of supply and demand
The forces of demand and supply play major role in price determination. Buyers normally tend to purchase products at reasonably lower prices to get maximum satisfaction. Similarly sellers try to maximise their profits by selling things at higher prices. So, when both these forces interact, the buyers will restrict their purchases when the prices increase and increase their purchases when prices fall. Naturally, when there are no buyers at increased prices, the supplier is forced to decrease his price a little to attract buyers. When price falls the buyers will increase their demand. Similarly, when the prices fall too much, there will be excessive demand for products but the supplier may not have enough supply to meet their demand. Then, buyer will be willing to buy at an higher price. Thereby, the prices will increase. In this way, the price level settles at a point of equilibrium where quantity demanded and quantity supplied matchup. Price gets influenced in this way with the forces of supply and demand.
Government policies
Government can always try to regulate the prices through its policies and laws to safeguard the interests of consumers. So, the producers and sellers have to fix their prices in accordance with those policies and guidelines or else they may have to face legal proceedings and bans.
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