Like, who decided a carton of eggs cost 5$, or a specific car costs $50,000? I understand some of it is based on raw materials cost, labor costs, etc.
And big manufacturing companies can have market analysis to determine what price to make profits via supply and demand. But for basic commodity goods like groceries that are sourced from farmers and the like, how did they land on a specific number?
In: Economics
Supply and demand. Eggs are a good example.
Let’s say you have 100 cartons of eggs to sell every day, and you price them $10 each. No one buys them and you’ve made 0 money. The next day you’ve priced them $2. In 3h you’ve sold them all and made $200. There was such a rush on the eggs that you believe you can sell them for more than 2. The net day you price them at 7 and you sell 60, the day after you price them at 4 and you sell out. Then at 6 and you sell 80, then at 4.5 and you sell you out again.
You repeat this a few days, tweaking the price further down, until eventually you price them 4.8 and you sell 99 out of the 100 in a day. You know that you couldn’t sell more that day, otherwise the last carton was sold as well, so you got the maximum price for it and made the most money.
The price of a carton is now established at 4.8.
Then there are 1000 more factors that go into this that makes it go beyond eli5.
For items that have been around a long time, you can “turn the dial” on your price, and see what happens to your sales. Obviously you could make your eggs 1 cent per dozen, and sell them all, and go broke. If you charge a dollar a dozen and they all sell, you could try $1.25, $1.50, and so on until you find a price where you’re selling *almost* all your eggs, and around there is where you stop. (With something nonperishable, you might consider continuing to raise the price, but a 6-month-old egg is no good to anybody, so ideally you want a price that gets 100% of your eggs off the shelf before they become garbage.)
If your product is brand new and doesn’t have any history, like if you’re producing a new kind of car, you can do market research to see what your competition is – i.e. what cars already exist that are sort of close to yours. If your car is comparable to a Cadillac CT5 ($38,000-ish) or a Toyota Camry (up to $35,000-ish), now you get to decide how to market your car. You can try “ours is just as good and a bit cheaper”, or “we’re a bit more expensive because we’re prestigious”; that depends on what you think your customers are like, and what your advertising department thinks it can pull off. 🙂
None of it is directly based on raw materials cost or labor costs…it’s all priced at what the seller believes the customer will pay. You hope that’s more than it cost you, and in a highly competitive environment like basic eggs it will be really close to production cost *because* of the competition, but it’s always priced at what the seller believes they can get the buyer to pay. In the long run that will always be more than production cost but it can sometimes be *way* higher.
Pricing is set by the seller. No one person decided that a carton of eggs cost $5. Everyone selling eggs tries to get the most they can for their eggs but they’re all competing with each other. If one seller drops to $4 then the others will two because, for the most part, eggs is eggs and the person selling at $4 will get all the business (until they sell out). That type of decision making happens constantly, all the time, for all sellers. This is why prices change so often.
Think of it as tug of war: buyers vs sellers.
If there are more buyers than sellers – the price is pulled higher.
If there are more sellers than buyers – the price is pulled lower.
As prices go higher, it brings more sellers into the market.
Or think of an auction – but if the price goes high enough someone else starts selling another identical item.
Basic economic principles of supply and demand.
If the price is set too low, you get shortages (consumers buy the product, but the shelves are empty because production can’t keep up)
If the price is too high then you lose sales (the product will still be supplied but consumers won’t buy it)
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