Market prices of goods are affected by supply, demand, competition, and substitutes. Other factors like exchange rates, environmental concerns, and political instability also play a role. The level of supply and demand, competition, and availability of substitutes are the main factors affecting market prices.
Factors affecting the market price of goods include supply, demand, competition and substitutes. Depending on the market, there may be other factors such as exchange rates, environmental concerns and political instability. Price fluctuation also differs from one market to another.
The level of supply of a product is one of the main factors affecting its market price. If the product, or the raw materials to create this product, are in limited supply, the market price will increase as supplies decrease. For example, when the supply of oil decreases, not only does the cost of oil increase, but so do products that use oil as a raw material. Conversely, when supply levels continue to increase, the market price will most likely decrease or stay the same; the market price may remain unchanged if society does not wish to pass the savings on to its consumers.
The demand for a product also significantly affects its market price. If demand increases while supply remains the same, prices will most likely rise. For example, if a wedding photographer begins to experience greater demand for her services than she does, then she may be more inclined to raise her prices. If supply and demand increase simultaneously, there may not be a price change. This can be seen in the book industry, for example, when a novel becomes a bestseller and more books are printed to meet demand without an increase in price. Demand levels can be influenced by changing demographics, consumer tastes and economic conditions.
The competitive landscape will also determine the market price for a product or commodity. Monopolies can usually set their own prices as customers are unable to shop elsewhere, while competitively saturated markets often see lower prices. It often happens that more competitors within a market will lead companies to become more efficient in order to offer competitive prices.
The availability of substitutes is also an important price factor: if the price of a product becomes too high, consumers will switch to a substitute. For example, if the cost of gas becomes too high for consumers to drive their own cars, they may start riding bicycles or using public transportation to avoid the extra expense. The more substitutes available, the more likely customers are to become price sensitive, decreasing demand as prices rise. If there is a low supply of substitutes, companies can usually charge higher prices as customers have no other options.
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