How are prices set?

Determinants of Price

Demand

• Price
• Income
• Tastes
• Expectations

Back to the demand over price graph on the previous blog entry, we saw that when price increases the demand decreases. If the consumers see a higher price, they will be buying less of that product.

If the consumer's income increases then the demand will increase as well; that is when the product is classified as a normal good. Although, when it comes to inferior goods, demand decreases as the consumer's income increases.

"Tastes" is a word that is used to define the attitude of the consumer towards the product. If someone likes the product, he/she will want to get it. In other words, when "tastes" increases, the demand increases.

Expectations is when the producers will expect when the consumer's income increases or decreases and set for future prices.

The changes in demand fall upon these determinants of demand.

Supply

• Production Cost
• Technology
• Numbers of sellers
• Expectations on the business

Businesses would want to make the most profit out of the least amount of cost. High production costs mean less profit. Factors that affect production costs are input prices, wage rate, government regulation and taxes.

More advanced technology that requires less work and produce the best outcome will reduce production cost and increase profit so there will be higher supply.

More sellers in the market can increase the supply.

Expectations will help the producers to determine when to use the supply at the right amount and time.

A change of in the supply is determined by these determinants of supply.

Bibliography

Beggs, Joddi. "The Determinants Of Demand." About.com Economics. About.com, n.d. Web. 05 Dec. 2012. <http://economics.about.com/od/demand-and-the-demand-curve/ss/The-Determinants-Of-Demand.htm>.

Anonymous. "How Does Consumer Income Affect the Demand for Normal and Inferior Goods?" WikiAnswers. Answers, n.d. Web. 05 Dec. 2012.

Taltman3. "Business Solutions." Business Solutions. N.p., 14 May 2011. Web. 07 Jan. 2013. <http://teamaltman.com/2011/05/great-web-entrepreneurs-–-set-the-right-prices/setting-prices-how-to-set-right-product-price/>.