Tag: price rise/inflation

There are certain factors which govern the prices. Internal and external factors. Internal factors are the ones which are caused internally in the organization due to certain policies set by the firm. Thus the cost and management policies influence the prices. 

The main element in the price-setting process of a product is the cost data of the product. This is because for any producer, it is first important to cover up the cost of making the good and then add a profit margin to set the appropriate price. Thus, it is important to cover the cost so that the firm does not incur a loss.

At the time of barter system, commodities were exchanged for commodities. But after the introduction of money, the concept of opportunity cost came up where the real value of a commodity is measured in terms of the next best alternative that needs to be sacrificed to buy the commodity.

The paradox of value, also known as the diamond water paradox, is a contradiction which means that the total utilities yielded by commodities do not necessarily have relationship to their prices. We see that though water is available in abundance and it so useful and essential for survival yet it costs much lower than diamond which is just a luxury item costs much higher price in the market. This paradox discusses the concepts of value in use and value in exchange. The things which have the greatest value in use have little or no value in exchange; whereas those which have the greatest value in exchange have frequently little or no value in use.

When the diminishing marginal utility is set in the market then that is compared with various prices in the market for the commodity which decides the ideal price for the commodity in the market which the consumer is willing to pay if they get required utility from the product. 

In a capitalist economy, personal gains are given more preference than social welfare. Therefore, allocating of resources takes place on the basis of what value it will yield after production and this done through prices.

Law of supply states that if the price of a commodity changes other factors remaining constant then the quantity supplied of the commodity also changes.