MCom I Semester Business Environment Price Study Material Notes
Table of Contents
MCom I Semester Business Environment Price Study Material Notes : Meaning of Price Forms of Price Factors Affecting Price Causes of Rising in Price Trends in India Consequences of rising in Price Remedies to prevent price rise Efforts to Maintain control on Price Rise in India Long Answer Questions Short Answer Questions Objectives Questions :
CTET Paper Level 2 Previous Year Science Model paper II in Hindi
Price
Price is the most important subject of the micro and macro branches of economics. In the micro sense, the price means the price of goods and services while in macro economics, price represents the general price level of the nation. The rising price level affects the economy. The price affects the various components of the economy such as, consumers, producers, traders as well as the government. Price stability is essential condition for stability in economy life as well as for economic growth. Fluctuations in prices create an atmosphere of uncertainty which is not very conducive to developmental activity. Whatever be the changes in prices, they will ultimately influence the economic activity.
Price Study Material Notes
MEANING OF PRICE
The payment made for the goods and service is the price. In the present monetary system, the payment for goods and services is made in the currency of that country. Therefore, price is the quantity of money which is paid for one unit of goods and service. When exchange is done without the intervention of money, the price of that commodity and service will be expressed in the term of of that commodity which is used in exchange. For example, price of rice 12. If one Kg rice is exchanged for two kg. wheat the price of rice will be equal to two kg wheat. Thus, the price is the exchange value of a commodity or service which is paid for sale or purchase of it. Generally it is expressed in the terms of money.
FORMS OF PRICE
Exchange price of goods and services are of various kinds. They are as follows.
1 Controlled Price : At some times, the government is aware that free competition and free prices are not fully applicable because of serious demandsupply gaps in some essential goods. Therefore, prices will have to be controlled to some extent, though price controls have to be kept to the minimum level. In situation of acute scarcity, price control prevents the producers from charging a higher price.
2. Regulated Price: The price of goods and services of public utilities are regulated by the concerned authority. When the prices of these goods and services are fixed by the specific authority or specific board, it is known as regulated price. For example, Telecom Regulatory Authority of India, Energy Authority, International Airports Authority of India fix the prices for their services, it is regulated price.
3. Administered Price : The government of India follows administered price policy in respect of commodities which are either vital industrial raw materials, produced wholly or largerly in the public sector such as steel, fertilizers. coal and petroleum products. The government also fixes the rates and charges of public utilities like railways and state electricity board. Administered prices are normally set on the basis of cost plus a stipulated margin of profit. As the administered prices are often inadequate to meet cost escalation, basic industries were unable to generate sufficient finanical resources for modernisation and expansion.
4. Wholesale Price : When the commodities are exchanged in large quantities, their price is fixed below the market price. It is known as wholesale price. The wholesalers purchase goods in large quantities. Due to the huge finanical resources, they have strong bargaining power. The wholesale prices are set on the basis of costs and low margin of profit.
5. Retail price : The retailers purchase and sell the goods in small quantities. The margin of profits is higher in retail business. Wholesalers supply the goods to the retailers at the wholesaler rates of the commodities that is their cost plus small profit margin. The retail prices must be fixed at a figure which will bring in a reasonable rate of profit. The retail price is always higher than the wholesale price.
6. Market Price : In price determination process of a commodity, the market price is the most popular concept. Market price is determined by the forces of demand and supply. The market price comprises of the cost of producing that commodity and some profit of the producer. Minimum market price is equal to the cost of production of the commodity and maximum market price is determined according to the relative demand of the commodity. If in the market place, the demand is greater than the supply, the market price may be established at the level well above the cost of production.
7. General Price level : When the changes in prices are considered on aggregate basis or national basis, it is known as change in general price level. The general price level is expressed in terms of all commodities. By averaging prices of all commodities, we might get an accurate idea of general price level. A rise in the general price level implies that in general the prices of goods and services are rising. General price level is indicative of average tendency of prices.
Price Study Material Notes
FACTORS AFFECTING PRICE
Fluctuations in prices influence the living standard of people. Prices of commodities are influenced by both the internal and external factors. The causes of fluctuation in prices are as follows:
1 Internal Factors: The main internal factors which cause price rise are related to increase in cost of production, distribution and management. These factors are as follows:
(i) Volume of Profit: When firms seek to increase their profits by raising prices independent of increase in costs, the price will rise. For firms to maintain high price level it must believe that their products have inelastic demand.
(ii) Level of management: The level of management efficiency in business also influences the price. An efficient management is capable of reducing costs of production and as a result the prices are low while an inefficient management wastes the materials and thereby cost of production increases and in turn price increases.
(iii) Advance technology: If modern and impro in production, the commodities can be produced at low If modern and improved technology is applied production will reduce the price. modities can be produced at low cost. The low cost of
(iv) Efficiency of Employees : If the employees of the firm there will be optimum utilisation of resources. This will Employees : If the employees of the firm are efficient, production and ultimately prices.
(v) Production cost : The production cost is the important component of the price. The cost of production includes the expenditure on raw materials, wages, factory and office expenses. If the sales and distribution expenditure on these items per unit is more, the prices will be high and vice-versa.
2. External factors: In addition to the internal causes, the external factors, such as market condition, government policy, competition, population etc, also influence the price of commodities. The external factors influencing price are as follows:
(i) Government Policy: The price of commodities also depend upon the market conditions if the commodities are of the nature of public utilities and the government has adopted the price control policy, the price of the commodity will be set up by the government, otherwise the price will be determined by the market forces of demand and supply.
(ii) Money inflation: The situation of a steady and sustained rise in general prices is usually known as inflation. Everything would be costing more and more. Inflation is associated with high prices which cause decline in the purchasing power of money or the value of monetary unit while deflation is a condition of falling costs and prices and the purchasing power of money increases. In inflation prices increase even though the cost of production remains constant.
(iii) Population growth: Whenever, there is a spurt in the population of a country, the balance between demand and supply becomes unequal. There will be more demand than supply. This will result into price-rise.
(iv) Utility of commodity : Utility of a commodity creates its demand. The greater the utility of a commodity the higher will be the price. When the new products are introduced in the market it reduces the utility of the old commodity their price will become low.
(v) Market conditions : The price of commodity also depends on the market conditions. In a free competitive market, the price of the market, the price of the commodity will be high. Taste, preference fashion and interest of the
(vi) Taste of consumers : Taste, preference fashion and rice of commodities. Demonstration effect also consumers also affect the price of commodities. Demons influences the demand as well as the price of the commodity .
The about mentioned analysis makes it clear that the internal and external The above mentioned analysis makes it clear that of commodities. These factors may operate singly or factors influence the price of commodities. These factor another. The external causes of price rise are operative on the demand side resulting in excess of demand and service. The internal causes of price rise are and, by increase in salaries, wages, cost of machinery ems of management etc. Actually all the above factors to exert inflationary pressure. in combination with one another. The external cause primarily by factors operating on the demand sider over available supply of goods and service. The in effective, on the other hand, by increase in sa and equipments, problems of management operate simultaneously to exert inflationary
Price Study Material Notes
PRICE TRENDS IN INDIA
In developing countries like India, which are predominantly dependent upon agriculture, the prices of agricultural commodities hold the key position in the price structure of the country. Any distortion in agricultural prices leads to a distortion in the wholesale price structure. Further, the developing countries are not in position to finance thier plans through voluntary savings of the people and taxes recovered by the government. They have often to resort to deficit financing. Deficit financing to some extent is good and can be absorbed by the economy without experiencing inflation. However, the investment expenditure made by the government under the development plans not only generates the additional demand for goods, but it also increases productive capacity. The long term projects can help in increasing the supply of consumers goods only in the long run. In the short run, prices generally shoot up under the pressure of excessive demand for goods and once inflationary spiral starts operating it becomes difficult to control it.
The Government of India started with 1950-51 as the base year. Then government started a new series with 1960-61 as the base year. In fact, in its anxiety to prevent people from making a real comparison of the continually rising price level and rapidly decling purchasing power of the rupee. Since 195051, the government had kept on changing the base year every decade from 1950-51 to 1960-61, later to 1970-71 to 1981-82, to 1993-94 and finally to 2004-05.
The various changes in the price level in India are usually measured in the terms of wholesale price index (WPI). WPI is the main measure of the rate of inflation in India. In the whole of the planning period starting from 1950-51 till now, it was only during the First Plan period that general price level recorded a fall. However, severe macro-economic imbalances develop due to lack of fiscal discipline there is no option left except increasing the money-supply. In this environment, the government should have undertaken some serious efforts of fiscal correction. However, nothing of the sort happened and inflationary pressures continued to increase unabated.
Price Study Material Notes
CONSEQUENCES OF RISE IN PRICE
A rise in the level of price entails a series of shifts of wealth and incomes, generally speaking, the impact of price-rise is felt unevenly by different groups of individuals within the national economy. Some gain some lose and some stand in between. When .inflation continues for a long time and if the rate of price rise remains unanticipated it disrupts the society economically, morally, socially and politically, let us now examine the consequences of price rise in detail:
1, Effect on investments and savings: Declining value of money impairs the incentive to save and place a premium on improvidence and careless spending. The price rise may have an important bearing on the level and structure of interest rates. This not only obstructs domestic capital accumulation but also derives available capital out of the country. Foreign investments are discouraged. Nor is the attitude and behaviour of the entrepreneurs favourable to increased production. The dislocation of the normal channels of credit will cut funds off from some types of investment and lead to over investment in others. Thus, not only the volume of total investment would be reduced, the allocation of investments will be made less efficient over and above all these, the rise in price level has eroded the volume of investments in real terms.
2. Effect on consumption : In India. 21.9 percent of the total population lives below the poverty line and nearly 50 percent population belongs to middle dass. They are not organised to press for higher payments to compensate for a fall in their real incomes. Their incomes lag behind the prices in the short run and adjust hardly, if at all, in the long run. It adversely affects consumption.
3. Increase in inequalities : When prices rise continuously over a long period, inequality of income amongst different groups proves that inflation results in erosion of their purchasing power. It actually lays burden on those groups of people who cannot protect themselves. They are also not able to bear its burden. It is thus, regressive in its effects and this bringing about unjust redistribution of wealth and income.
4.Effect on foreign trade : The price rise also puts uneven burden on different countries in the world economy. The countries experiencing a relatively higher degree of inflation suffer on account of changing exchange rates leading to devaluations and unfavourable terms of trade. Prices in India have risen more sharply than in most of the other countries. This created two problems in these countries from the point of view of balance of payment. First, the demand for India’s products declined in the foreign markets and the task of increasing exports became more difficult. Secondly, Indian importers finding that foreign goods were cheaper, tried to increase imports.
5 Economic insecurities: The tendency of rising prices creates the fear of economic insecurity for future, when prices rise all around and incomes lag behind, the consumers are compelled to curtail their expenditure. As a result of slackening demand for the product, recessionary tendencies develop. Continuous and persistent rise in prices is also one of the causes of world wide recession. Thus, only way to reduce unemployment and at the same time curtail it is by planned methods requiring skill, patience and courage on the part of the authorities together with a substantial measure of continuity. When prices steadily rise at a moderate rate, favourable climate is created for investment which eventually results in larger income and fuller employment. But the way prices had risen in India over a period of more than four decades, has done more harm than good to the economy and people. This has not only inflicted sufferings on the multitude of people, but also disrupted the developmental efforts, time and gain. Therefore, it is necessary for the government to remain vigilant.
Price Study Material Notes
CAUSES OF RISE IN PRICE
According to the general principle of economics, price of a commodity is influenced by the forces of demand and supply. The general price level is also determined by the opposite forces of demand and supply. There are some other factors which also influence the price. They are as follows:
1 Import on high prices : Import of raw materials for consumer goods at high rate increase the cost of production and ultimately the prices of the commodities concerned.
2. Effects of speculative activities: The tendency of hoarding of essential commodities among the traders and in industrialists creates the artificial scarcity of goods. Hoarding aggravates scarcity conditions and pushes up the prices level. Although speculation has been a common phenomenon in India it was one of the major causes of upward movement of prices.
3. Deficit financing: The government of India is responsible for adopting deficit financing as a method of financing economic development. When the government is not able to raise adequate revenue for its expenditure, it can meet its deficit by borrowing funds from banking system. Mounting government expenditure, financed through deficit financing directly pushes up the money supply in the country and consequently pushes up public demand for goods and services. An important factor for any spectacular rise in prices in all countries is the expansion in money supply-in fact, without monetary expansion inflation cannot remain sustained at all for any length of time and India is no exception to this. The Government of India has been responsible for the inflationary situation in the country.
4. Inadequate production : Huge fluctuations in the output of food grains in certain years were a major factor in the rise of food grain prices as well as general prices. In fact the supply of the manufactured goods did not increase adeqately in certain period. Power break downs, strikes and lockouts and shortage of transport facilities are major factors for low rate of production of manufactured products and because of all this, the producers are in position to push up the prices of their products.
5. Inflationary reasons : Government expenditure has been steadily increasing over the years. Not only the developmental expenditure has been rising, but non-developmental expenditure has been rising at much more rapid rate. Mounting government expenditure implies a growing demand for goods and services and thus, is an important factor for the rise in prices. Besides continuous increase in government expenditure has the effect of putting large money income in the hands of general public and stroking the fire of inflation.
6. Increase in population : It is the continuously rising population which is responsible for the persistent gap between demand and supply, in all consumers goods and services, thus exerting continuous pressure on prices. It is indeed a pity that both the monetary and the structural experts either ignore or underplay the effect of the growth of population on prices. In fact, the problem of prices for that matter, every problem in India, cannot be solved satisfactorily, unless the population growth is checked.
The expanding demand is due to the rapid multiplication of our population, rising money incomes, expansion in money supply and liquidity in the country, rising volume of black money and continuous rise in demand for goods and services due to periodic wars, rapid economic development, etc. Supply of goods and services too has been rising but the rise in supply has not been proportionate to and matching the rise in demand; this is due to monsoon agriculture, use of backward technology, bottlenecks in transport and power and shortage of various inputs. It would thus be too simplistic to hold any one of the factors responsible for infationary rise in prices in India during the recent years. Actually, all of them have collectively contributed to the inflationary situation in India.
Price Study Material Notes
REMEDIES TO PREVENT PRICE RISE
It is true that attempts to stop inflation are fraught with difficulties. But the evils of inflation leave hardly any room for complacency and call for effective measures to combat inflation. It is not going to be easy to get out of inflation, and the longer it is left unrestrained, the harder it gets. The following measures may be adopted to check price rise in the economy :
1 Rebate in taxes : The indirect taxes are the major component of market price. By reducing the taxes on commdities, the government can check the price rise.
2. Restructuring Public Distribution System : The distribution of essential commodities through fair price shops at government controlled prices has come to be known as public distribution system. In order to maintain stable price conditions, an efficient management of the supplies of essential consumer goods is necessary. For the public distribution system to be really useful, it is necessary to expand it quickly to cover all areas in the country, particularly the backward, remote and inaccessible areas. Special attention has to be given to rural areas as the system is relatively less developed in such areas.
3. Reduce the deficit : The government has always adopted a policy of deficit budgeting. Thus, instead of checking prices, the government policy has actually pushed up prices. Efforts are being made to avoid deficit financing. It was only since 1990-91 that the government of India has appreciated the importance of reducing fiscal deficit. However, in the budget for 1991-92, an attempt was made to eliminate fiscal imbalance by bringing down fiscal deficit of the Central Government. The Central Government has brought down its fiscal deficit to 4.1 percent in 2005-06, 3.4 percent in 2007-08. The budget of 2008-09 kept the fiscal deficit target for the year at 2.5 percent.
4. Efforts to increase production : Several areas of production are regulated through industrial licensing and by investment control measures. An encouragement to the production of certain articles is necessary. Increased production helps in raising supplies and thus keeping prices away from rising rapidly. In order to improve supply position of certain essential commodities the goverment has often allowed their imports. The Food Corporation of India (FCI) continuously organises market sales of rice and wheat to prevent increase in their market prices. These measures have succeeded temporarily in the past in moderating rapid increase in the general price level, but they will not be effective enough to stablise prices in the long period.
5. Reduction in Government expenditure : Government expenditure has been steadily incresing over the years. In a predominantly agriculture economy like India, big programmes of economic development involving huge investments have been undertaken. Not only the developmental expenditure has been rising, but non-developmental expenditure has been rising at much more rapid rate. Continuous increase in government expenditure has the effect of putting large money income in the hands of general public and thus stroking the fire of inflation. By reducing its expenditure, the government can counteract an increase in private expenditure and reduce aggregate expenditure.
6. Control of hoarding : Hoarding and black money play a significant role in causing inflationary tendency in a country. Traders hoard articles so as to create an artificial shortage in the supply of food grains and consumers goods. The government should take appropriate steps against hoarders and black marketeers, so that their activities are checked. To check prices and to eliminate hoarding and speculative activity in foodgrain trade, wholesale dealers in foodgrains were licensed in many states. Limits were also fixed beyond which traders and producers could not hold stock without making stock position declaration.
7. Use of new technology : Introduction of new technology in agriculture and industries may reduce the cost of production which will help in controlling prices.
Price Study Material Notes
EFFORTS TO MAINTAIN CONTROL ON PRICE RISE IN INDIA
A wide range of measures are being adopted to ensure stable conditions as well as to prevent speculators from taking an undue advantage of the conditions of artificial scarcity. Since the price situation in the country is the outcome of shortage in basic goods and services and rapid growth in money supply and bank credit, various types of measures relating to money supply, pricing and distribution of commodities are pressed into service.
The price rose during 1990-91 and 1991-92 and average annual scales of inflation were 10.3 percent and 13.7 percent respectively. The double digit inflation continued for the better part of the 1994-95. Since then, the inflationary situation has come under control. During 1999-2000 the average annual rate of inflation was the lowest-3.3 percent (with 1993-94 = 100). The annual point to point inflation rate remained below 2 percent till the end of May 2002 but rose thereafter and stood at 6.2 percent on April 5, 2003. During 2005-06, the average annual rate of inflation was 4.4 percent while it was 5.5 percent in 2006-09 and the inflation rate rose to 8.02 percent in March 2008. This was a matter of serious concern and a number of steps were announced to tackle the problem. Howoever nothing of the sort happened to check inflation and inflationary pressures continued unabted. The inflationary pressures have increased further in 2008-09 and the inflation rate is much higher than the inflation target of 5.5 percent set by the RBI for the year 2008-09.
Supply management is related to the volume of supply and its distribution system. Through increase in domestic supplies, large releases from official stocks and widening and streamlining of the new work of public distribution, the government has made attempts to prevent an undue increase in the prices of essential commodities. India has to adopt the buffer stock operations in agricultural crops for stablising their prices. Buffer stock operations serve twin purpose of offering price support during periods of prosperity and offer low prices and price moderation during years of scarcity. Buffer stock operations are carried on by the Food Corporation of India (FCI). India has achieved self-sufficency in foodgrains since 1970s and has sustained it since then. It improved its capacity to cope with year to year fluctuations in food production by building up large buffer stocks and supplying these stocks to people through PDS. During some of the recent years, the buffer stocks have considerably exceeded the minimum norms. On 1 January, 2015 Buffer stocks were as high as 61.6 million tonnes while the buffer stock norms was 21.41 million tonnes. Major problems of buffer stock operations relate to pricing, finance, warehousing, administration etc. In recent period also cash reserve ratio (CRR) has been used extensively as a measure to control inflation. In respect of selective credit control the RBI has relied mainly on three techniques, viz, determination of marginal requirements on advances against the security of essential commodities like foodgrains, sugar, oilseeds, cotton, vegetable oils, determination of ceilings on advances and other financial accomodations; and charging discriminatory interest rates on certain types of advances. This selective credit control has now been abandoned as an anti-inflationary measure.
The essence of price policy since 1973-74 has been mostly to rely on fiscal and monetary measures with a view to check the demand of general public for goods and services. The Government of India has generally insisted on controlli its own expenditure and keeping in check both its revenue deficit and fiscal deficit–this has been a major instrument of inflation control. In order to improve supply position of essential commodities the government has allowed their decontrol with the abolition of quantitative controls, imports of essential commodities can be made easily to augment their supply. To conclude, stablisation of agricultural prices can be achieved on an enduring basis by increasing
Price 217 agricultural production. This requires a higher rate of growth of population over a long period. Along with a better supply position, the management of supplies in an efficient manner is also essential. This requires an effective policy of procurement, the critical use of buffer stocks and strong measures to curb the activities of traders, hoarders and big land lords to create either artificial scarcity or to take advantage of the conditions of scarcity.
Price Study Material Notes
EXERCISE QUESTIONS
Long Answer Questions
1 What do you understand by price? What are its types? Explain.
2. Define price. Explain its objective and process of pricing.
3. What do you understand by price? Explain the various types of its policies.
4. Explain the objectives of pricing and factors affecting pricing decisions.
5. Explain briefly various price policies which can be adopted in different stages of a product life cycle.
6. “The success or failure of business depends to a large extent on its price policy.” Discuss this statement.
Price Study Material Notes
Short Answer Questions
1 Define price.
2. What is meant by price?
3. What do you understand by economic price?
4. Write the procedure of pricing.
5. Write the objectives of pricing. Objective Questions
(I) Choose the correct alternative :
1 The factors affecting price are:
(a) market price
(b) administrative price
(c) level of management
(d) all of above
2. The payment made to obtain a commodity or service is known as:
(a) price
(b) service
(c) resource
(d) none of these
3. The retail price in comparison to wholesale price is :
(a) low
(b) high
(c) neither low nor high
(d) none of these
4. Average price trend is known as:
(a) retail price
(b) wholesale price
(c) market price
(d) general price
5. The population growth increases:
(a) price
(b) markets
(c) foodgrains
(d) none of these
(Ans: 1. (c), 2. (a), 3. (b), 4. (d), 5. (a)]
Price Study Material Notes
(II) Write True or False :
1 Fluctuations in prices do not create an atmosphere of uncertainty in the economy.
2. The payment made to obtain goods and services is known as price.
3. Price is the exchange value of goods and services.
4. Market price is determined by the equilibrium between demand and supply.
[Ans:(1) False, (2) True, (3) True (4) True]
(III) Fill in the Blanks :
1 Price of commodity at national level as well as at individual level is a subject
2. Internal factors affecting the price of a commodity are related to its production,
3. Price is the sum total of cost of the production and
4. When the volume of exchange is more, its price is less than …..
(Ans: 1. sensitive, 2. distribution and management, 3. profit, 4. market price]
