What is price? Definition and meaning
The price is the amount of money – the sum – or its equivalent for anything that is offered for sale – bought or sold. Put simply, it is how much the seller will accept for the sale of a product or service.
Today, prices are expressed in units of local currency, such as dollars in the United States, pounds in the United Kingdom, euros in most European Union states, and yen in Japan. Commodity prices are expressed as currency per unit weight of that commodity, e.g. dollars per ounce.
Prices could be quoted as quantities of other products or services, however, this type of barter exchange is hardly ever seen these days. Some prices are quoted in a customer voucher reward system, such as air miles or trading stamps.
In a capitalist economy, prices are determined by market forces – supply and demand. In a command economy – communist system – prices are set by a central authority; usually the government.
In many prisons, times of hyperinflation and in a black market economy, prices may be quoted in units of a product such as cigarettes.
According to BusinessDictionary.com, price is:
“A value that will purchase a finite quantity, weight, or other measure of a good or service.”
“In commerce, price is determined by what (1) a buyer is willing to pay, (2) a seller is willing to accept, and (3) the competition is allowing to be charged. With product, promotion, and place of marketing mix, it is one of the business variables over which organizations can exercise some degree of control.”
Price vs. cost
The term does not have the same meaning as ‘cost’. Cost is the expense a commercial entity incurs in creating a product or service and bringing it to market, while price is the amount the consumer (customer) pays for that good or service.
The difference between the cost incurred in creating a product and getting it to market and the price customers pay for it is the profit a business makes – its margin or mark-up.
Pablo Picasso, a Spanish painter, sculptor and printmaker, once said: “Every positive value has its price in negative terms… the genius of Einstein leads to Hiroshima.” (Image: biography.com)
Imagine you are a customer and pay $25 dollars for an item that cost a firm $10 to produce and sell. That business makes a $15 profit.
Pricing loans and derivatives
In a number of financial transactions, it is common to quote prices in specific ways.
When pricing a loan, for example, the cost is expressed as the percentage rate of interest. The total amount of interest that has to be paid depends on the creditworthiness of the borrower, the loan amount, and how long the money will be lent for.
The price of inflation-linked government securities in most countries is quoted as its actual price divided by a factor representing inflation since it was first issued.
In modern societies, the price of a good or service is expressed in currency. In some parts of the world, prices are still quoted in product equivalents.
Other meanings of price
The word has many meanings both in and outside the world of business and finance.
– A wanted criminal: when we say “The criminal had a price on his head,” we are talking about a sum of money offered by the authorities for his capture – sometimes alive or dead.
– Bribing people: the term can also be used when referring to the point at which a person’s integrity or honesty becomes compromised, as in “Every person has a price.”
– Sacrifice: we can use the word when there is a great challenge ahead and the only way to overcome it is with considerable sacrifice, as in “They were eventually victorious, but at a considerable price.”
– Basic Price: this is the price a vendor gets after deducting all taxes paid by a buyer and adding any subsidy the seller receives for selling.
– Producer Price: this is how much the producer receives from a buyer for a unit of a product or service produced as output minus any tax. It does not include any transport charges the producer may have invoiced separately.
The verb ‘to price’
As a verb, ‘to price’ can mean:
– to discover how much things are, as in “We went around all the dealers pricing different minivans.”
– to establish how much people will have to pay for something you are selling, as in “We have priced our new smartphone at $500.”
– sometimes it may also be used t explain why a product failed to succeed in a competitive market because the seller set the price too high, as in “He priced himself out of the market.”
Video – What is price?
This video explains what prices are using simple and easy-to-understand terms.