Determination of prices is a very important managerial function in formulating appropriate business policy. Price affects profits through its effect both on total revenue and total cost.
Total profit is the difference between total revenue and total cost. Total revenue equals price per unit multiplied by the quantity sold.
The quantity sold varies with variations in the price and the total cost depends on the volume of output. The management tries to find out the combination of price and output which will give it the maximum profit.
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If the price is set too high, the volume of sale will fall and if the price is set too low, the seller may not be able to cover his total cost. Therefore, the pricing decision is very important for a business firm.
However, all firms are not able to set prices for their products; they are price-takers rather than price-makers and, under the pressure of competition, must accept what they can get for their products.
So under pure competition sellers have no pricing problems because they have no pricing discretion; they sell at the market price or not at all.
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Price policy has significance for the management only when there is a considerable degree of imperfection in competition, so that sellers can make some sales despite disparities with competitors’ prices.
Considering the nature and extent of monopolistic elements, economists classify markets as follows:
Pure Competition Imperfect Competition
Monopoly Monopolistic Oligopoly Competition
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We shall consider price output determination under perfectly competitive markets, imperfectly competitive markets, monopoly markets and oligopoly markets.