The economy of the world is based on the selling and production of goods and services. Companies and industries have certain norms and policies through which they provide their service to people, and they have to pay for what they receive accordingly.
In that context, price and cost, the two mentioned terms are used widely and interchangeably.
Normally people do not know the exact meaning of the words, but when it comes to the economics and business terms, the two mentioned terms have entirely different meanings and relevance.
Key Takeaways
- Price is the amount of money a consumer pays to purchase a product or service, while Cost is the total amount of money a producer spends to produce the product or service.
- Price is influenced by factors such as demand, competition, and production costs, while Cost includes all expenses incurred during the production process, including raw materials, labor, and overhead costs.
- Price can be increased or decreased depending on market conditions and consumer demand, while Cost is more fixed and can only be reduced through cost-cutting measures.
Price vs Cost
Price is money which the customer pays to buy products or services. The company decides the price of a particular product or service. The terms ‘fees’ or ‘rent’ can be used while referring to the price of a service. Cost is the money spent by the organizations to provide products or services to customers. Cost can be further categorized into various parts.
The company determines the price of a product and includes the cost spent in manufacturing the product or providing the given service along with the profit of margin they will receive after selling it to their customers or clients.
For example – If any product is priced at Rs. 50, and the cost spent on its manufacturing is around Rs. 40, then the rest of Rs. 10 is the profit gained by the company on the product.
Cost includes the additional expenses spent on labour, manufacturing, raw materials, etc. It is the initial thing to be included while deciding the market value of the product, good, or service.
Therefore, it directly affects the market value of any product, goods, or service. The computation of the expenditure estimates the value of the cost required.
Comparison Table
| Parameters of Comparison | Price | Cost |
|---|---|---|
| Definition | Paid for a product or service by a customer | Expense in providing a service or product |
| Nature | It is decided by the organization. | It is decided under the cost of goods sold (COGS) |
| Ranking | Determined after adding all the factors | It is the first thing listed. |
| Ascertainment | For customers | For manufacturer or producer |
| Classification | Further in four parts – bid price, selling price, buying price, and the transaction price. | Further in many parts – variable cost, fixed cost, opportunity cost, etc. |
| Estimation | By pricing policy | By computation of expenditure |
| Determines | The charges made by the company | Charges spend by the company. |
| Impact In Market | May increase or decrease | Input cost may rise or fall. |
What is Price?
The price of any product, good, or service is to be defined as the amount of money paid by customers or clients for the product or goods they buy or the services they receive.
The price includes both the cost of manufacturing the product or the amount spent by the company in providing the service along with the profit of margin gained by them.
Price is a word which can be used in different contexts like if the context is related to products, then the word remains the same, but if the context is related to any service, the word reference gets changed some of these are listed below-
- Fees – For professional services
- Premium – For any insurance
- Rent – Charge for any machinery
- Fare – For any transportation
In economic or business terms, it can be said that price is where supply demands meet. Price can be further classified into four categories: Bid price, Selling price, Buying Price, and Transaction Price.
What is Cost?
The cost of any product or service is the amount of money paid to manufacture the products or give any service before it is sold or marketed to the clients or customers. The cost includes the expenditure on raw materials, labourers, distribution, marketing, capital, machinery, etc.
For example – A car is priced at Rs 16 lakhs on-road price. The amount spent on the manufacturing of the car is around Rs. 14 lakhs, the rest is the profit gained by the company and Rs 14 lakhs is the cost price for it.
The cost spent on producing a product or providing a service increases or decreases the product’s market value. Thus, before deciding the market value of any product, it is necessary to include all the factors involved.
The estimation is done with the help of the computation of the expenditure. Cost is further classified into many parts. The major two are given below –
- Fixed Cost – It remains the same despite the change in the production of units. Examples – Rent, Depreciation, Insurance, etc.
- Variable Cost – It changes with the change in the production of units. Example – Labor, Raw material, etc.
Main Differences Between Price and Cost
- The Price of a product or service is the amount of money paid by the customer or client for the product they buy or for the service they received, whereas Cost is referred to the amount spent by the industry or company in providing you with the product or service.
- The company or organization itself decides the price of any product or service, while the cost of goods is decided by the Cost of Goods Sold (COGS).
- The product’s price is decided after including all the other factors, while the cost is the first factor listed.
- Price is ascertained from the customer’s perspective, while Cost is ascertained from the manufacturer’s or producer’s perspective.
- Price can be further classified into four parts that are – bid price, selling price, buying price, transaction price, while Cost can be further classified in many parts such as – variable cost, fixed cost, opportunity cost, etc.
- The value of the price for a product or service is estimated by the pricing policy, while the value of cost spend is estimated by the computation of expenditure.
- A price determines the amount to be paid by a client or customer for a product or service, whereas the cost determines the amount spent by the company in providing the service or product.
- The value of price may increase or decrease depending on the demand in the market, while the value of cost may rise or fall depending on the fluctuation in the market.
References
- https://www.jstor.org/stable/3003262
- https://www.journals.uchicago.edu/doi/abs/10.1086/261918
- https://www.sciencedirect.com/science/article/abs/pii/0749597888900350
- https://www.journals.uchicago.edu/doi/abs/10.1086/261918
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