How Utility and Demand Affecting Price Determination?

The Utility and Demand:

While the product costs set the subordinate restrictions of the price, the utility provided by the product and the strength of demand of the buyer sets the higher limit of price, which a buyer would be ready to pay. In fact the price must imitate the attention of both the parties to the transaction—the buyer and the seller. The buyer may be prepared to pay up to the summit where the utility from the product is at least equal to the sacrifice made in terms of the price paid. The seller would, however, try to at least cover the costs. According to the law of demand, consumers usually purchase more units at a low price than at a high price.

The price of a product is affected by the elasticity of demand of the product. The demand is said to be elastic if a relatively small change in price results in large change in the quantity demanded. Here numerically, the price elasticity is greater than one.

In the case of inelastic demand, the total revenue increases when the price is increased and goes down when the price is reduced. If the demand of a product is inelastic, the firm is in a better position to fix higher prices.