This is concerned with the study of prices and is regarded as the basis of economic theory. It is concerned with the economic behaviour of individual consumers, producers and resource owners. It explains the production, allocation and pricing of goods and services.
Price is the exchange value of a commodity in terms of money. OR: The amount of money that has to be given up in order to obtain a good or service or a factor input.
A market is an arrangement that brings together buyers and sellers to transact business at a particular period of time. It is the total number of buyers and sellers involved in the exchange of a given product at a particular period of time.
A market is not restricted to an area but it takes place in different ways like on phone, telefaxing, Internet, etc . In the market, buyers and sellers must communicate together and in so doing, they influence the price.
A market has the following characteristics:
TYPES OF MARKETS:
• Product/ Commodity Markets ; these are markets in which goods or services are traded.
• Resource/ Factor Markets; these are markets in which production resources/factors of production especially labour and capital are traded.
• Spot Markets ; these are markets where a commodity or a currency is traded for immediate delivery.
• Forward / Future Markets ; these are markets where buyers and sellers make a contract to buy or sell commodities at a fixed date at the price agreed upon in the contract/agreement.
• Free Markets ; these are markets where government exerts no control/ intervention.
• Controlled Market ; these are markets where the government or central authorities exerts a degree of control, for example by fixing prices, setting quotas etc.
• Perfect Market ; this is the market where none of the buyers or sellers have the powers to influence prices in the market by either influencing demand or supply.
• Imperfect Markets ; this is where the buyer or seller has the power to influence the price in the market by either influencing demand or supply.
• Organised Markets ; these are formal markets, such as a commodity market each dealing in a worldwide commodity, e.g. coffee, sugar, cocoa, rubber, etc.
TYPES OF PRICES
1. Normal Price; this is the one which is obtained where supply and demand are equal in the long run period .i.e. The long run equilibrium price.
2. Equilibrium Price; this is the price at which quantity supplied equals quantity demanded. It is determined by the interaction of the market forces of demand and supply. I.e. it is set or fixed at a point of intersection of demand and supply curves in a free enterprise economy.
Illustration of Equilibrium Price
3. Reserve Price ; this is the price below which a seller is not willing to sell his/her product.
OR. It is the least /lowest possible acceptable price a seller can sell his or her product.
Determinants of Reserve Price
Expectation of future demand for the product. If the seller expects the demand for the product to rise in future, he/she fixes a high reserve price so that more is sold in future thus earns more profits. However if the seller expects the demand for the product to fall in future, he sets a lower reserve price so as to sell more currently and earn more profits.
Durability or Perishability of the product. Durable goods can be kept for a longer period of time and therefore a higher reserve price is fixed since the seller is not afraid of his/her product getting spoilt. On the other hand for perishable goods a lower reserve price is set because they cannot be kept for long period of time.
Cash flow requirements in the business. The greater the need for cash in business the lower the reserve price set by the sellers’ products because there is an urgent need for money in the business. On the other hand the less the need for cash in business the higher the reserve price set by the sellers; this is so because there is less urgent need for cash in the business.
The storage costs in relation to future price. The higher the storage costs, the lower the reserve price set by the seller this is so because the seller wants to sell off the products as fast as possible in order to reduce on the storage cost. On the other hand the lower the storage costs, the higher the reserve price set by the seller because the seller is not in a hurry to sell off his products since the storages costs are manageable
The length of time it takes before a new supply of goods reaches the market. (Gestation period). The longer the period it takes for a new supply of goods to reach the market the higher the reserve price set by the seller; this is so because the seller scared of new supply of goods outcompeting the old stock. However the shorter the time it takes for new supply of goods to reach the market the lower the reserve price since the seller wants to get rid of the old stock before the new stock reaches the market.
The future cost of production. The higher the future cost of production, the lower the reserve price set by the seller, this is because producer would prefer to produce and sell more when production costs are low. On the other hand the lower future cost of production the higher the reserve price, this is because producer would prefer to produce and sell more in future at low costs of production.
DETERMINANTS OF MARKET PRICE.
Through Haggling/Bargaining; this is where a seller and a buyer carry out negotiations over the price until the two parties reach an agreeable price. Bargaining depends on the skills of a buyer and the seller. If the buyer has got more bargaining skills, then the price will be in his/her favour and if the buyer has got more bargaining skills, then the price will be in his /her favour depending on the bargaining zone.
Through Auctioning/Bidding/tendering. This is where a seller offers a product for sale and calls for bids (price offers) and the highest bidder takes the commodity. This is common in fund raising functions and sale of government property.
Through the market forces of demand and supply; this applies for transactions in a free market situation whereby the price is determined by the free interplay of the market forces of demand and supply. The point of intersection is where the price is reconciled.
Sale by treaties/agreements; this is where buyers and sellers come together to fix the price of a given commodity e.g. the price of coffee is usually fixed by the international coffee agreement.
Price leadership; this is where a dominant or low cost firm sets up a profit maximising price and other firms follow it.
Government policy of price legislations; this is where the government fixes the price for the commodity through price control policy. It can either be a minimum price fixed above the equilibrium to protect the producers or fix a maximum price below the equilibrium to protect the consumers.
Offers at fixed price by individuals, government, institutions, this is where a seller sets a price for his/her commodity and the buyer has to buy that commodity at that price e.g. price in the supermarkets, government fixing wages of civil servants.
Collusion/cartel arrangements; this is where different firms producing a similar commodity come together and agree on the price to charge for their product.
Resale price maintenance; this is a practice where producers fix prices at which their products should be sold to the final consumers
OR; This is a system where producers insist on fixing prices at which their products should be sold up to the retail level.
This is commonly used in the newspapers industry where manufactures fix prices at which consumers should buy these commodities.
ADVATANGES/MERITS OF RESALE PRICE MAINTENANCE;
• It helps to protect consumers from exploitation by middlemen.
• It helps to reduce competition especially between small scale and large scale retailers.
• Helps to maintain price stability.
• Business profits are easy to compute.
• Helps the seller to increase his profits through increased sales.
• It saves time since there is no need for bargaining.
FUNCTIONS OF PRICE IN THE MARKET
Measuring the value of commodities; the worth of commodities is expressed in terms of money. Guiding producers on what to produce. Producers normally go for commodities which fetch high prices.
Guiding consumers in making consumption decisions/plans. Consumers put into consideration the prices attached to the various needs/wants before buying goods and services.
Determining income distribution i.e. producers who sell their goods at higher prices earn more income than those who sell at low prices.
Guiding producers on how to produce /determining the technique of production to use i.e. producers normally go for an affordable method of production in order to minimise the cost of production so as to maximise profits.
Guiding producers on where to produce/ choosing the best location for the business. Producers always set up firms in those areas which have attractive markets and where consumers can afford to pay high prices for their goods so as to maximise profits.
Guiding the producer on deciding for whom to produce/ providing automatic adjustments between demand and supply.