What is meaning of Price? Here’s a complete understanding and function

What is the price? When a customer goes to the grocery store to buy wheat flour or uses a food delivery app to order a burger, the customer is expected to pay for this offer. The money charged here is the price. But actually, the price we pay for this offer is more than that.

What exactly is that price? What determines the price of an offer? Is it the same as the cost? Let’s discuss in depth through this article:


1 What is Price?
2 Price Function
2.1 Price distribution function
2.2 Price signal function
2.3 Price incentive function
2.4 Price transmission function
3 How Are Prices Determined?
4 Differences Between Price and Cost

What is the Price?

Price is the value or money that customers give in exchange for a particular offer that will serve to satisfy their needs and wants.

In simple terms, price is a measure of the value that customers exchange for purchasing an offer.

Price serves as an economic mechanism using which offers can be distributed among customers in the market.

It also acts as an indicator of the extent to which an offer is requested and also the extent to which it is supplied or available.

The price of a product is the total value of the offer, including the value of all raw materials and services used to make an offer. Service pricing takes into account all the elements involved in making the service what it is.

Price Function

In a free market, prices serve several purposes. Listed below are some of the functions you should know about:

1. Price distribution function

Price has the ability to distribute scarce resources. Scarcity of resources causes resource prices to be high, so that only customers who buy show willingness and ability.

For example, diamonds are a luxury that only those who are willing and have sufficient financial resources can afford it.

2. Price signal function

Often, bid prices vary by volume of demand and supply – by scarcity or excess supply in the market.

If demand is high, but supply is low, the market will clearly see the price increase. For example, gold is a scarce resource that experiences constant price increases over the years as its demand increases.

Similarly, if the market has an excess of a certain commodity due to lower demand and higher supply, its price tends to fall. This will allow the elimination of the surplus of this commodity in the market.

3. Price incentive function

Usually, when the price of a commodity rises, it is because its demand is increasing. This allows suppliers to see changing customer demand trends in the market.

Hence, they will prefer to come up with a particular offer as it is most likely to be profitable.

4. Price transmission function

Prices must transmit information to all parties involved in the market, and this, in turn, allows producers and customers to make informed decisions in the market. For example, a good quality offer may cost more than an offer using cheaper raw materials.

Therefore, the customer will be able to derive this information from the drastic difference in the price of these similar offers. Similarly, bid prices will help suppliers determine the type of demand that supply sees in the market.

This will allow the supplier or producer to decide whether production and supply offerings will help them earn more significant profits.

How are Prices Determined?

The price depends on the law of supply and demand. That is, it goes up or down until the quantity demanded equals the quantity supplied. This point is called the equilibrium price.

If the demand for a supply is greater than the supply, the price will rise, so that only buyers who access the supply have the willingness and ability to buy it. This increase until demand and supply meet at equilibrium.

If supply exceeds demand, the price falls to the equilibrium point.

what is the price is

Difference Between Price and Cost

People often use the terms price and cost interchangeably. People might say, “I have to pay a lot for this new television.” While the phrase still conveys a message when used in conversation, both price and cost are technically different concepts when we talk about finances.

While the bid price is the monetary amount the customer pays to obtain a particular offer, the bidding cost takes into account the seller’s expenses in making the offer. Simply put, the price concerns the buyer, while the cost concerns the seller or producer of an offer.

Companies with the goal of maximizing profits will look for ways to reduce costs so that prices exceed them, allowing them to earn greater profits.

If the bid price is set to a lower point where the cost is higher than the price, the company will incur a loss because the seller does not get back the amount he spent making the offer.

Meanwhile, if the price and cost of supply are the same, the company is said to be at the break-even point; it makes no profit or loss.

If you are a business owner, it is very important to make sure that the prices you charge for the services or goods you sell are appropriate.

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