The effect of various factors on price determination is:
(i) Objective Price of a product depends upon the firm’s objective. A firm may decide out of several objectives, e.g. profit maximisation, a specific level of profit, target level of sales, a particular share of the market, prevailing market price, etc.
The price fixed for the product must be in line with the firm’s pricing objective.
(ii) Cost Essentially, retail prices are cost of production and distribution plus the profit margins. No business can survive for long without covering its costs.
In the long-run, price should cover the total cost per unit, but in the short-run, price should cover variable cost of production.
(iii) Competition Prices charged by competitors often act as the guide in a pricing decision, e.g. Maruti Udyog has to decide the price of its Zen and Alto cars keeping in view an competing
brands like Santro, Indica and Palio.
(iv) Buying motives A customer may pay a high price to satisfy his vanity. This happens when an article is purchased for status or prestige. ,Price must be consistent with the desired public ’ image of the product.