Factors of production
In order to produce goods and services we need factors of production like land
labour capital and entrepreneurship. Prices paid to these factors for their services is
called factor prices.
Land – Rent
Labour – wages
Capital – interest
Entrepreneurship - profit
Rent: Meaning and Types
Generally, rent refers to the payment made by the user of
material assets to the owner of material assets such as building,
furniture, land etc.
In economic sense, rent can be defined as the payments which
are made to the landlord by the user of land for the use of his
land.
Marshall, “The income derived from the ownership of land and
other free gifts of nature.”
Economic Rent and Gross Rent
• Gross rent or contract rent can be defined as the total payment made by the tenant
to the landlord for using his land in production process.
• It is pre-determined before start of production and based on the contract between
landlord and tenant, therefore it is called as contract rent.
• It consists of pure rent, cost of land reform and maintenance, reward for risks,
depreciation funds, reward for management etc.
• Normally when we call rent, it is gross rent.
• Economic rent refers to the actual payment made for the use of land only.
• It is determined after completion of production process on the basis of total value
of production and the opportunity cost of the factor.
• It is the residual amount of the gross rent after deducting other various amounts
and also called as pure rent.
Wages: Meaning and Types
• Wages are the remunerations paid to the labor i.e. payment made for the services
of labor which may be physical or mental.
• Benham, “A wage may be defined as a sum of money paid under the contract by
an employer to the worker for service rendered”
• It is any type of reward for human exertion, whether paid by day, hour, month or
year and paid in cash,kind or both.
Nominal wage and Real wage
• Wage paid to the labor in terms of money is called as nominal wage or money
wage.
• Money wage will not reflect the real earning of labour.
• Real wage not only include money wage but also some other facilities, comforts
and luxuries which the labor can get in return for his services.
• J.L.Hanson, “Real wages is the wages in terms of goods and services that can be
bought with them.”
Profit : Meaning and Types
• Generally, the excess of income over his expenditure is called as profit.
• In economic sense, profit is the net income of a business after all the other costs
such as rent, wages, and interest etc have been deducted from the total income.
• Prof. Hansen, “profits are residual income left after all the payments have been
made.”
Gross Profit and Net Profit:
• Gross profit is difference total revenue and total cost of the production. When we
call profit it is normally gross profit.
• Net profit or Pure profit is the income received by the producer after deducting
explicit as well as implicit costs.
Interest: Meaning and Types
• Generally, interest is payment made by a borrower to the lender for the money
borrowed.
• It is the difference between the sum of money borrowed and the sum of money
contracted to be returned after a stipulated period of time.
• Carver, “Interest is the income which goes to the owner of capital.”
• Keynes, “Interest is the reward for parting with liquidity for a specific period.”
Gross Interest and Net Interest
• Gross interest is the amount paid by a borrower to a lender as a return on capital
borrowed.
• When we talk about interest, it is gross interest.
• Gross interest not only includes payment for use of funds but also the compensation
for the risk involved in recovering the loan, return for inconveniences, cost of
managing loan etc.
• Net interest is the price paid for the use of capital only.
• It deducts all other payments paid other than use of capital.
Pricing Practices
Cost based pricing : Refer Material of module 4
Competitive based pricing
Limit Pricing
Peak Load pricing
Life cycle pricing
Competitive based pricing
• Competition-based pricing is a pricing strategy in which a company sets the
price of its goods or services by considering the prices of competing products in
the market, with the goal of attracting consumers by offering competitive or better
value.
Example: The Coca Cola Company has a vast range of products that they sell into
multiple global markets, and, as such, will implement a wide range of different
prices strategies. However, for the most part, if we look at the Coca Cola product
alone, they operate a Competitive Based Pricing strategy, closely tracking the price
of their biggest competitor Pepsi.
Limit Pricing
• Limit Pricing is a pricing strategy a monopolist may use to discourage entry. If a
monopolist set its profit maximising price (where MR=MC) the level of
supernormal profit would be so high it attracts new firms into the market.
• Limit pricing involves reducing the price sufficiently to discourage entry of new
firms. It leads to less profit than possible in short-term, but it can enable the firm
to retain its monopoly position and long-term profitability.
• Sometimes Oligopoly firms also use limit pricing to avoid entry of new firms.
• Example: Netflix, Disney+ etc. price their subscriptions low to make it difficult
for new competitors to enter the market.
Peak Load pricing
• The Peak Load Pricing is the pricing strategy wherein the high price is charged
for the goods and services during times when their demand is at peak. In other
words, the high price charged during the high demand period is called as the peak
load pricing.
• Example :
Electricity: Charging Higher charges during peak demand hours.
Airfare: Airfare prices are higher during holidays.
Life cycle pricing
• Product life cycle pricing is a marketing
strategy that takes into account the stages a
product goes through, from launch to
Decline
1. Launch Or Introductory Phase:
• Price Skimming: Setting a high price
initially to capture early adopters and • Penetration Pricing: Launching
maximize profit margins, especially when with a low price to gain significant
the product is perceived as innovative or market share quickly, often used
exclusive. when competition is high or the
goal is rapid market penetration.
Life cycle pricing
2. Growth Or Early Adopter Phase :
this is the stage of rapid increase in sales, rising profits, growing market awareness,
increased competition from new entrants,
• Value-Based Pricing: Setting prices based on the perceived value of the product
to customers, focusing on differentiation and features.
• Competitive Pricing: Matching or slightly undercutting competitor prices to
maintain market share
Life cycle pricing
• Maturity Stage:
characterized by stable sales, market saturation, intense competition, and a focus on
maintaining market share rather than rapid growth; essentially, most potential
customers already have the product, so sales growth slows down significantly,
• Promotional Pricing: Offering temporary price reductions or discounts to
stimulate sales and counter competition
• Product Line Pricing: Creating a tiered pricing structure with different product
variations to cater to diverse customer needs
Life cycle pricing
• Decline Stage:
characterized by a significant drop in sales, decreasing profitability, increased
competition from newer alternatives, and a need for companies to either adapt or
exit the market, often due to changing consumer preferences or technological
advancements
• Harvesting: Reducing marketing efforts and raising prices to maximize
remaining profits
• Discount Pricing: Offering deep discounts to clear out remaining inventory
