Price Determination

Price is the worth that buys a finite amount, weight, or another match of goods or services. In other
words, it also expresses the value of the goods produced and the services rendered by factors
of production such as land, labor, and capital. Thus, the determination of prices is of great significance in
an economy.

Introduction to Determination of Prices

Determination of Prices means to determine the cost of goods sold and services rendered in the
free market. In a free market, the forces of demand and supply determine the prices.

The Government does not interfere in the determination of the prices. However, in some cases, the
Government may intervene in determining the prices. For example, the Government has fixed the
minimum selling price for the wheat.

Factors affecting Determination of Prices

The factors which affect the price determination of the product are:

1] Product Cost

Product cost is one of the most important factors which affect the price. It includes the total of
fixed costs, variable costs and semi-variable costs incurred through the production, distribution,
and selling of the product. Fixed costs refer to those costs which remain fixed at all the levels of
production or sales. For instance, rent, salary, etc.

Variable costs attribute to the costs which are directly related to the levels of production or sales.
For example, the costs of basic material, apprentice costs, etc. Semi-variable costs take
into account those costs which change with the level of activity but not in direct proportion.
2] The Utility and Demand

Habitually, end user demands more units of a product when its price is low and vice versa. On
the other hand, when the demand for a product is elastic, little variation in the price may result in
large changes in quantity demanded.

While, when it is inelastic a change in the prices does not affect the demand significantly. In
addition, the buyer is ready to pay up to that point where he perceives utility from the product to
be at least equal to the price paid.

3] The extent of Competition in the Market

The next consistent factor affecting the price of manufactured goods is the nature and degree of
competition in the market. A firm can fix any price for its product if the degree of competition is
low. However, when there is competition in the market, the price is fixed after keeping in mind
the price of the substitute goods.

4] Government and Legal Regulations

The firms which have a monopoly in the market, habitually charge a high price for their
products. In order to protect the interest of the public, the government intervenes and regulates
the prices of the commodities. For this purpose, it declares some products as indispensable
products. For example, Life-saving drugs, etc.

5] Pricing Objectives

Another consistent factor, affecting the price of an item for consumption or service is the pricing
objectives. Profit Maximization, Obtaining Market Share Leadership, Surviving in a
Competitive Market and Attaining Product Quality Leadership are the pricing objectives of an
enterprise. By and large, firm charges higher prices to cover high quality and high cost if it’s
backed by the above objective.

6] Marketing Methods Used

A range of marketing methods such as circulation system, quality of salesmen, marketing, type
of wrapping, patron services, etc. also affects the price of manufactured goods. For instance, an
organization will charge sky-scraping revenue if it is using the classy material for wrapping its
product.

The price that makes demand equivalent to supply is called the equilibrium price. Graphically, it can be
said that the equilibrium price is the point where the demand curve and supply curve intersect. It is the
price at which there is no unsold stock left neither is any demand unfulfilled. Thus, it is also known as the
market clearing price.

Once the Equilibrium price and quantity are reached, we attain Stable Equilibrium. Stable equilibrium
adjusts any disturbance in the demand and supply and restores the original equilibrium.

Other things remaining the same, when the price falls below the equilibrium price, the demand increases
and supply decreases. There arises a shortage of goods which in turn increases the price to equilibrium
price.

Similarly, when the price rises above the equilibrium price, the demand decreases and supply increases.
There arises a surplus of goods which in turn decreases the price to equilibrium price. Thus, the market
restores the equilibrium price on its own.

However, the prices are not determined only by the forces of demand and supply. Other factors such as
the price of substitute goods, price of related goods, government policies, competition in the market, etc.
also play an important role in the determination of the prices.

Meaning of Economic Theory:

Economics is a science which like any other science depends on an organised body of theoretical
knowledge. Theoretical knowledge is based on facts. And facts based on verified hypotheses are raised
to the status of a theory. As put by Boulding, “Theories without facts may be barren, but facts
without theories are meaningless.”
What is a Theory? A theory expresses a causal relationship between cause and effect. It attempts to
explain “why”. It consists of a set of definitions stating clearly what we mean by various terms, and a
set of assumptions about the way in which the world behaves.

The next step is to follow a process of logical deduction to discover what is implied by these
assumptions. These implications are the predictions of our theory which can be tested by the process
of observation and statistical analysis of the data. If the theory passes the test no consequent action is
made necessary.

If the theory is refuted by the fact, it is either amended in the light of newly acquired facts or is
discarded in favour of a superior competing theory. Economic theory is a theory in this sense. It is
meant to be about the real world.

Nature of Economic Theory:

Economic theory involves generalisations which are statements of general tendencies or uniformities
of relationships among various elements of economic phenomena. A generalisation is the
establishment of a general truth on the basis of particular experiences.

For example, the generalisation that demand is an inverse function of price expresses a relationship
between price and demand, other things remaining the same. If other things remain the same, the law
of demand holds valid. If other things do not remain the same, it stands refuted.

Applicability of Economic Theories to the Problems of

Developing Countries

Economic development is a critical component that drives economic growth

in an economy, creating new job opportunities and facilitating an improved
quality of life that includes increased access to opportunities created by
economic growth for existing and future residents. The Orlando Economic
Partnership’s economic development team works to attract and retain jobs
for the Orlando region as well as grow existing industry sectors. The
Partnership also works to align the region with a vision for the region’s
growth that increases participation in the local economy (a vision the
Partnership has termed Broad-Based Prosperity ). While the work of economic
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developers often falls under the radar, building and sustaining the regional
economy is a critical component to a successful community.
These are the top six reasons why economic development plays a critical
role in any region’s economy.

1. Job creation

Economic developers provide critical assistance and information to

companies that create jobs in our economy. We help to connect new-to-
market and existing companies with the resources and partners needed to
expand, such as industry partners like CareerSource Central Florida and
the Florida High Tech Corridor, utilities, and local government partners.

2. Industry diversification

A core part of economic development works to diversify the economy,

reducing a region’s vulnerability to a single industry. While tourism plays an
important role in creating jobs in the Orlando region, economic
development efforts help to grow industries outside of tourism,
including advanced manufacturing, aerospace and defense, aviation, autonomous
vehicles, biotechnology and pharmaceuticals, business services, gaming, entertainment
technology, financial technology, life sciences and healthcare, logistics and
distribution, medical technology, and innovative technology.

3. Business retention and expansion

A large percentage of jobs in the Orlando economy are created by existing

companies that are expanding their operations. The Partnership’s economic
development team executes numerous business retention and expansion
visits to local companies just last year to assist with their operational needs.

4. Economy fortification

Economic development helps to protect the local economy from economic

downturns by attracting and expanding the region’s major employers. For
example, when the COVID-19 pandemic heavily impacted the global
leisure and hospitality industry, many technology companies transitioned focus to
clients in the region’s modeling, simulation and training sector.

5. Increased tax revenue

The increased presence of companies in the region translates to increased

tax revenue for community projects and local infrastructure. Economic
development can also support major job creation initiatives such as
the semiconductor research and development campus NeoCity, positioning the 500-
acre development opportunity for critical funding for domestic
semiconductor research and manufacturing through advocacy for the
CHIPS and FABS Acts.
6. Improved quality of life

Better infrastructure and more jobs improves the economy of the region and
raises the standard of living for its residents. Quality of place is more
important than ever to attract a large talent pool in the era of increased
remote workers.

In addition, inclusive economic development works to support the

community’s quality of life through initiatives such as supporting the
regional transportation network, affordable housing, innovation and
entrepreneurship as well as upskilling opportunities for the local workforce. These
initiatives help to provide access and capabilities for existing workforce to
take advantage of the new high-wage job opportunities created by
economic development efforts.

Indifference Curve Technique

What Is an Indifference Curve?

An indifference curve, with respect to two commodities, is a graph showing those combinations of the two
commodities that leave the consumer equally well off or equally satisfied—hence indifferent—in having any
combination on the curve.

Indifference curves are heuristic devices used in contemporary microeconomics to demonstrate consumer
preference and the limitations of a budget. Economists have adopted the principles of indifference curves in the
study of welfare economics.

Understanding an Indifference Curve

Standard indifference curve analysis operates on a simple two-dimensional graph. Each axis represents one
type of economic good. Along the indifference curve, the consumer is indifferent between any of the
combinations of goods represented by points on the curve because the combination of goods on an indifference
curve provide the same level of utility to the consumer.

For example, a young boy might be indifferent between possessing two comic books and one toy truck, or four
toy trucks and one comic book so both of these combinations would be points on an indifference curve of the
young boy.

Indifference Curve Analysis

Indifference curves operate under many assumptions; for example, typically each indifference curve is convex
to the origin, and no two indifference curves ever intersect. Consumers are always assumed to be more
satisfied when achieving bundles of goods on indifference curves that are farther from the origin.

As income increases, an individual will typically shift their consumption level because they can afford more
commodities, with the result that they will end up on an indifference curve that is farther from the origin—hence
better off.

Many core principles of microeconomics appear in indifference curve analysis, including individual
choice, marginal utility theory, income, substitution effects, and the subjective theory of value. Indifference curve
analysis emphasizes marginal rates of substitution (MRS) and opportunity costs. Indifference curve analysis
typically assumes all other variables are constant or stable.

Most economic textbooks build upon indifference curves to introduce the optimal choice of goods for any
consumer based on that consumer's income. Classic analysis suggests that the optimal consumption bundle
takes place at the point where a consumer's indifference curve is tangent with their budget constraint.

The slope of the indifference curve is known as the MRS. The MRS is the rate at which the consumer is willing
to give up one good for another. If the consumer values apples, for example, the consumer will be slower to
give them up for oranges, and the slope will reflect this rate of substitution.