Price of a product is influenced by many factors. Such factors are explained below as :
(i) Cost of product : The product cost involves the cost of procuring, distributing and selling the product. The costs sets the minimum level or the floor price at which product can be sold. The price should recover total costs (fixed costs as well as variable costs) in the long run including a margin of profit over and above cost.
(ii) Price elasticity of demand for the product: In case the demand for a product is price elastic the firm cannot charge a higher price. This is because in such a case, a slight rise in the price would result in a large fall in the demand. As against this, if the demand is price inelastic, then the firm has the privilege of charging a higher price. This is because for such product even at a high price, the demand would not fall much.
(iii) Degree of competition in the market : If a firm faces high competition (i.e. if a large number of similar product are available in the market), this suggests that a firm cannot even slightly increase the price of its product.
(iv) Methods of marketing: Methods of marketing used by the firm such as distribution, advertisement, customer services and branding also affect the determination of prices. If a firm incurs a huge cost on marketing of a product, then it would generally charge a higher price.