Market Price

The market price is an important concept that impacts several decisions, whether a business pricing strategy or government policy. It reflects the supply and demand and shows the actual price at which consumers buy a good or service in the market. From an entrepreneur, consumer, or policymaker, all of them need to understand the market price to navigate through the economic landscape. Additionally, comparing the market price with basic price provides a clear picture of the producer's earnings.

 

What is the meaning of Market Price?

The market price is the actual price at which the goods and services are actually bought and sold in the market. The prices include indirect taxes like VAT and sales tax. This excludes subsidies that the government may give on the product. For example, if the products sold in a market for INR 100 but there is 10% sales tax, the market price would be INR 110 which includes the tax. 

Example: If you go to the store and purchase a soft drink for INR 40, that INR 40 is the market price. 

 

Formula for Market Price Calculation 

The market price is calculated by adding the indirect taxes to the factor cost and then subtracting the subsidies provided by the government. The result we get is the actual price paid by the consumer at the time of check out. 

 

Market price = Factor Cost + Indirect Taxes - Subsidies  Where,  Factor cost = Basic price - Indirect taxes + Subsidies

 

Want to dig deep into the topic? Learn more with Market Price vs Factor Cost vs Basic Price

 

How to determine the Market Price?

The market price is determined by studying the interaction between supply and demand in the market amid competitiveness. 

1. Supply and demand 

• Supply:The goods or services sold at various prices by the producers. When the prices rise, the producers supply more of the product and vice versa. 
• Demand: The goods or services that the consumers buy at various prices. When the product price rises, the demand decreases, and vice versa 
• The market equilibrium happens when the quantity demanded and supplied are equal at a certain price. This price is known as the market price

 

2. Market Equilibrium 

• At the equilibrium there is no shortage or surplus of goods or services 
• When the price goes too high, the supply goes up which leads to sellers lowering their prices to attract the buyers
• If the price is low then the demand goes up, and the sellers increase the price 

3. External Factors 

• The external factors are government regulations, subsidies, and market structure
• The competition, monopoly and oligopoly in market also influence the final price
• When the government imposes tax on a product, the price might go up. 
• When the government offers a subsidy to the producers, the prices might decrease 

 

What are the factors that affect Market Price?

There are various factors that affect the market price of the product or service. These factors are classified on the demand and supply side. 

Demand Side Factors 

• When the product has more demand because of the changes in trends and preferences, the demand for the product increases and the market price increases 
• When the consumer income increases, the demand for the product increases as more people can buy more goods. This makes the market price go up. When the income fails,demand may decrease which leads to a lower price
• When the price for the substitute good increases. Like tea, the demand for related goods like coffee also increases. 
• When the price for the complementary goods rise, the demand for the related product might fall. 
• The expectation of the consumer also affects the pricing and purchase of the product, increasing the demand and pushing the price. 

Supply Side Factors 

• When the cost of production rises, the market price goes up, as producers pass on the increased price to the consumers 
• The innovation makes the production more efficient, which can lower the costs for producers, thus lowering the market price and increasing the supply
• The reforms in government policies, taxes, tariffs, and regulations, increases the cost of production, which might lead to higher prices. 
• The more producers or suppliers in a market, the more competitive it becomes, which typically leads to lower prices. 
• Promotion of the product creates an impact on the consumer mindset and preferences 

 

Market Price in Different Areas

The market price adheres to different areas and contexts. It is a dynamic indicator of economic activity and having an understanding helps make the financial decisions in a better way. 

• Retail Goods: In retail, the market price is the amount customers pay for products. The pricing depends on the factors like trends, seasons, or consumer preferences. 
• Stock market: In stock market, the market price helps in determining the trades on stock exchanges like NYSE, BSE, or NASDAQ
• Agriculture: In agriculture, the commodities like wheat or rice, the market price is determined by commodity exchanges, supply-chain dynamic, and weather conditions
• Real Estate: In real estate, the market price is determined by factors like location, demand, and comparable sales 

 

Why is the Market Price Important?

The market price extends to a lot of areas, determining the real-time value and trends in the marketplace. 

• Provides a real-time value of goods and services. In any marketplace, the ongoing dynamic between the demand and supply is determined through the market price of the items
• Determines the stock pricing which helps people understand the amount investors are putting in at that moment of time 
• Helps the buyers understand whether the deal is fair, prevents them from overpaying, and offers a comparison across brands and sellers 
• Helps the sellers offer a competitive price and guides them through the changing markets 
• Analyzes the pricing strategies for different businesses and monitors the pricing 
• It is the market indicator which signals the inflation or deflation
• It influences the government and central bank policies 
• Offers a transparent trading system for the buyers and sellers 

 

Know More

• Partnership 
• Private Limited Company 
• Money Measurement Concept
• Cash Credit

 

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Frequently Asked Questions (FAQs)

How is the market price determined?

The market price is determined by studying the interaction between supply and demand in the market amid competitiveness. 

Are market prices fair?

The market prices are considered to be fair because they are determined by the buyers and sellers dynamic and the factors like inflation or preferences of the consumers 

What is the amount of time that the market price changes?

The market prices depend on the market. In stock and crypto, the prices may change after every second. However in real estate or retail the price change can be weekly or monthly.