1a. Identify and explain the main economic factors that determine the price of a good or service.
1b. The supporting readings cover the rising price of cotton and the extent to which this raw material cost will be passed onto retailers by the UK fashion retailer NEXT. Using this example, or one from your own professional experience, examine within your answer the circumstances that will enable a company to pass on cost increases to customers and protect profit margins.
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1a) Identify and explain the main economic factors that determine the price of a good or service.
Let us first understand the market equilibrium price of the product and then identify and analyze how factors such as change in demand and supply, elasticity, separating and pooling equilibrium, market structure determine the price of a good or service.
In free market, equilibrium price is the price at which there is no surplus or shortage and therefore quantity demanded equals quantity supplied (Sloman 2008). At equilibrium, any change in quantity demanded or quantity supplied will move the market towards disequilibrium.
Graph 1
Table 1
Market Equilibrium is at the combination P0Q0 where consumers demand and firms supply are equal.
(Lowes 2010a)

Market forces will push the market from disequilibrium towards stable position of equilibrium (Lowes 2010a).
Graph 2
Table 2
In shortage, buyers bid higher price due to scarcity of product whereas suppliers tend to increase the supply to earn higher profits leading to higher equilibrium price P*.
(Lowes 2010a)
Graph 3
Table 3
In surplus, suppliers sell at lower price to clear the stock and buyers buy more quantity at lower price thereby establishing lower equilibrium price P*.
(Lowes 2010a)
Let