How Cost Affect Pricing Decisions?

Price Above Cost

Market price and cost of production are two separate numerical figures altogether . Market price is best set at equilibrium (or balance ) with a certain quantity demanded . If the price is raised beyond the equilibrium price , market forces push the demand of the product or service down , as buyers turn to substitute products or services . When prices are below the equilibrium - a standard (or balanced ) price at which buyers and sellers are equally satisfied - the demand of the product or service is expected to increase . This is the basic law

of demand and supply , an interaction between market forces including regulations , consumers , sellers and their competitors

It is unreasonable to suppose that market prices can be set below the costs of production . After all , a firm that produces Good A will make a loss on production if it charges a price that is less than the cost that it paid for the production of the self same Good A . In to make a profit on production , the firm would have to charge a price that is above the cost of production at the very least . Generally , the cost of production is understood to be the cost of producing Good A plus the cost of transportation to the consumer . In to stay in business - and therefore , to avoid losses at all possible costs - the firm must cover all costs related to the production of Good A and include all costs to deliver the Good A to the consumer at a price that is higher than the cost of production . Business sense would prevail If the firm makes a loss , followed by more losses , it could turn out to be a vicious cycle ending with the closure of the firm

Similarly , a global organization must cover the costs of production to deliver Good A to the foreign consumer , regardless of where he or she is living in the world . This is the reason why global products - the popular goods and services of globalization - are under discussion for tariffs , etc . The prices of foreign goods must be higher than the prices of local goods because the cost of bringing a foreign good into the local market is typically much higher . This cost must needs include the price of producing the Good A

The organization cannot dream of charging prices below the cost of production seeing that the selling price of the product is the only income generating part of the marketing mix anyway (Zaribaf . Price controls are included among the costs that are incurred by the organization that sells products or services . Thus , pricing must also take account of regulations in markets . Such are the external environmental factors affecting pricing decisions . It may be that the Chinese government has price controls on certain foreign goods . Now , if the cost of production of a foreign good in the Chinese market must exceed the price control , it would not be possible for the foreign product to survive in the Chinese market . Hence , pricing decisions must take due consideration of external environmental factors such as regulations , and the prices of competing goods just as pricing decisions must surely include the internal company costs that are involved in the production of goods or services . The latter include costs of office space and raw materials - in fact , all explicit and implicit internal company costs that must be charged in the expense account of the goods and services produced

While it is essential for the company that wishes to continue its business to charge prices that are at least equal to the costs of production it is imperative also to create prices that attract and sustain our customers rather than repel them in the long run . So McDonald 's cannot really charge the exact same price in Ireland and Indonesia . For the consumers to stay `loving it (the Good A , for example ) the firm cannot charge prices that get the customers to suspect that perhaps they are being cheated , or that they are being sold goods or services at prices that do not match quality . Prices must be reasonable for consumers , and not just for the companies that produce the goods or sell their services and this is the condition at the market equilibrium level . This perfect market condition , undoubtedly takes due account of the internal company factor and external environmental factors , as goods and services are produced for the market to reach an equilibrium at satisfactory levels of demand

Works Cited

Zaribaf , M . Pricing Challenges in Global Marketing : A Model for Export Pricing . Social

Science Research Network , 2007 . 15 June 2007 . PAGE

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