In terms of commodity-money relations with concepts such as price and cost of goods, you have to deal with quite often. And this applies both to narrow-profile employees of enterprises (economists, financial analysts, accountants), and ordinary people, due to the fact that every day they are a buyer of certain goods and services. Most often, the cost and price of products are considered synonymous, although in the economy these are completely different concepts.
The specialized economic literature describes these terms in great detail. But how can a simple layman understand what the difference is? This article is intended to enhance the financial culture, which will reveal the difference between the cost and the price of the goods, show the pricing mechanism and what factors affect it.
Forms for determining the value of goods
There are only three of them, and these forms are indicated precisely in the order of their formation:
- Cost price.
- Cost.
- Price.
In order to understand the difference between value and price, it is necessary to consider each of them in succession.
Cost of production
Each product that appears in the consumer basket of the end consumer has traveled a difficult path. The beginning of the journey is the purchase of raw materials for the manufacture of a product by the manufacturer, then directly the production of component parts, then assembly, testing and other related processes and costs. The result is a finished product.
To produce finished products, the plant incurred certain costs, which make up its cost.
To the question "what is the cost of production" in the economic literature there are answers in the form of clear definitions.
In simple terms, cost is the total cost of manufacturing a product. As a rule, the cost price includes raw materials and supplies, workers' wages, electricity, water, rental of workshops, depreciation of equipment and other overhead costs incurred by the manufacturer during the production process.
What is the cost of production?
Why did the plant produce a product? Who will be interested in this product if it remains at the factory? Upon receipt of the finished product, the manufacturer expects to make a profit, which means that the further path of this product is to sell it to the final consumer, that is, to the one who owns and uses it. There are many ways of implementation, as well as intermediate links in this process. You can consider the simplest. The plant transfers its production product to the store, which intends to sell it to the end consumer. For example, the cost of production amounted to 200 rubles per 1 unit. What is the cost of production is already known. But it is also known that the plant intends to make a profit from the sale of manufactured products. Consequently, he gives his products to the store not for 200 rubles, but for 250 rubles per unit. At the time of the promotion of a production product for sale, it becomes a commodity, and the cost of production increased by a premium of the manufacturer's factory becomes its value.
Cost is the cost of goods increased by the producer’s expenses (taxes, deductions) and the percentage of profit sufficient for successful operations.
What is the price?
The store bought goods from the factory for the sole purpose of selling it to the consumer and making a profit. This means that the store will add its premium to the purchase amount, which will include transportation costs, advertising costs, store rental and other associated expenses for the sale of this product. It will also include the percentage of profit that the store intends to receive. The value of the goods, increased by the allowance for sales and the percentage of profit, is the price of the goods.
The price of the goods is the amount for which the seller is ready to sell the goods, and the buyer is ready to buy it.
Factors Affecting Price
If the cost and cost are constant (if we are talking about a small time period), then the price is the most volatile parameter. In addition to the standard seller premium, pricing is influenced by many factors. Here are some of them:
- The length of the chain of distributors from the manufacturer to the final consumer. It is easy to see this in the previous example. So, the plant manufactured products at a cost of 200 rubles per unit, transferred to the sale at a cost of 250 rubles per unit of goods. Suppose you bought a product from a factory not a store, but a distributor (intermediary) and resold this product to a store at a price of 300 rubles, putting in it your premium and percentage of profit. In turn, the store will sell this product to the final consumer, laying down its costs and the rate of expected profit. As a result, the final consumer will buy the goods at a price of 350 rubles. The more intermediaries between the producer and the final consumer, the higher the price of the goods, therefore, the higher the total difference between the value and the price of the goods in monetary terms for the final consumer.
- Supply and demand. The more offers of a similar product from sellers, the lower the price for end consumers will be, and vice versa. The same thing with demand: the higher the demand from consumers, the higher the price, and vice versa. For example, if our product could be bought in only three stores in the city, and every family needs it, then its price could well be 1000 rubles (despite the fact that the cost was 250 rubles). In this example, there is high demand and low supply. Another example, if the aforementioned product was sold in all stores, while everyone needs it, then the price would not exceed the competitive mark and could vary from 300 to 400 rubles (it depends, inter alia, on factor 1). Well, if demand is low, then the price will hardly exceed the cost with minimal margins.
- Seasonality and fashion. In this case, seasonality determines demand. For example, why are clothing and shoe stores often holding promotions and sales? At the end of the season, the demand for seasonal goods falls, and the area needs to be freed for the goods of the next season. That is why the seller is ready to sell unclaimed goods in the next season with a minimum margin, which significantly reduces the price. The same goes for fashion.
- Product uniqueness. The more unique the product, the higher its price, but the narrower the circle of potential consumers and the longer the sales time can be.
- Terms of storage of goods. The shelf life of the product affects the pricing mechanism of perishable products, such as vegetables, fruits, dairy and sour-milk products. The price drops to the lowest possible after the expiration date, and sometimes the seller is ready to give the goods at its cost in order to avoid even greater losses.
