Economy

Difference between price and cost

Price and cost are two very commonly used words in all areas of our lives. They are terms that are usually used as synonyms to refer to the value of things, however, in reality they are words that are applied to different meanings, which we will point out below, in this article.

Price

Price is understood as the result of the sum of the profit rate and the cost of the product to be offered. This means that a product that is going to be sold or offered in the market has a cost of manufacturing, elaboration or purchase and to this is added the benefit that the producer or seller expects to obtain when selling it, therefore , that sum (cost + profit) is the price of the product.

The price varies according to the cost, so it can be said that it is a consequence of it. In addition to this, it can also vary depending on the competitiveness of products of the same nature in the market. In order to position an item in the market, many producers must lower the price even though they may obtain lower profits but obtain a greater benefit in the medium or long term by positioning their product. However, the price is common to all buyers or customers.

In some countries, the price of an item may be regulated by various agencies to prevent some brands from setting excessive prices that harm the population. In the same order of ideas and as an example, in some products, you can see labels that indicate something like PVP (Retail Price) followed by a certain amount.

cost

The cost can be defined as the sum of all the expenses that a company has in the production process of a certain article. The cost is related to expenses for raw materials, labor and manufacturing, manufacturing or preparation and processing, as well as packaging and packaging.

To determine the cost, the company that produces an item takes an inventory of these expenses and that total is the cost of the item or product. Companies must set prices above the cost of the item to avoid incurring monetary losses that lead to bankruptcy. Additionally, the cost can be variable from one locality, zone, country or region to another depending on the raw material, since, if it is necessary to work with imported raw material, the cost of the product is usually higher than, when working with imported raw material. own premium of the area where the product is made.

In view of the above, it can be said that the most important differences between price and cost are:

  • The price is set by the market based on competitiveness, but the cost is set by the producing company based on the costs associated with the production of the product.
  • The price is the sum of cost plus benefit (profit), the cost is the sum of all manufacturing, production and marketing expenses.
  • The price may vary depending on supply and demand, but the cost may vary depending on the area where the raw material comes from, manufacturing costs, labor costs, among others.

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