The economy of the world is based on the selling and production of goods and services. The companies and industries have certain norms and policies through which they provide their service to people, and they have to pay for what they have received 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.
Price vs Cost
The main difference between Price and Cost is that Price is defined as the amount of money spent by a customer or client on any goods or services they buy or received whereas on the other hand, Cost is defined as the amount spent by various companies, industries in providing the same services or product to his clients or customers (includes raw material, laborer, manufacturing, etc.).
The price of a product is determined by the company 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 Rs. 10 is the profit gained by the company on the product.
Cost includes the additional expenses spent on labor, manufacturing, raw materials, etc. It is the most 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 value of the cost required is estimated by the computation of the expenditure.
Comparison Table Between Price and Cost
| 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, goods, 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 received. 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 context 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 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 that are – 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 giving any service before it is sold or marketed to the clients or customers. The cost includes the expenditure on raw materials, laborers, 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, then the rest is the amount of 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 increase or decrease the market value of the product. 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 computation of the expenditure. Cost is further classified in many parts the major two is given below –
- Fixed Cost – It remains the same despite the change in the production of units. Example – 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 the product or service.
- The price of any product or service is decided by the company or organization itself, while the cost of goods is decided by the Cost of Goods Sold (COGS).
- The price of the product is decided after including all the other factors, while the cost is the first factor that is listed.
- Price is ascertained from the perspective of the customer, while Cost is ascertained from the perspective of the manufacturer or producer.
- 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.
Conclusion
The terms are normally used interchangeably in our day-to-day lives without knowing the exact meaning of them. As they have different meanings and relevance, thus they should be used in the correct form and reference.
Price is the amount paid by the customer, while cost being the amount spent by the industry to provide the same service to their client or customer. The value of the price is flexible as per the demand in the market while cost is also differing rise and low depending on the fluctuations.
Price determines the amount spent by the ‘customer’ while cost determines the amount spent by the ‘industry.’ The process of estimation of the market value also differs in the relevance of the above terms as the price is estimated through pricing policies while cost is estimated through the computation of the expenditure.
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