Definition

Market Price

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What is the market price?

The market price is a prevalent term in business that refers to the monetary value of a commodity or a service by which it could be purchased or traded. The market price for a product or service is determined based on the supply and demand of that product. Market price can also be defined as the price at which the supply quantity is equivalent to the amount demanded.

Summary
  • Market price is defined as the monetary value of goods or services by which it can be purchased or traded.
  • Market price is directly proportional to the sale and is inversely proportional to the demand of a product.
  • Market price in financial market denotes the latest price at which the financial assets are traded.

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Frequently Asked Questions (FAQ)

How can we explain the relationship between demand and market price?

Demand can be defined as the desire of a consumer to purchase a product or service at a given price point during a particular time. Demand is inversely proportional to market price. When the demand for a product rises, the market price falls. Similarly, when the demand falls, the market price of that product rises high. The key elements that determine demand are- desire, ability to pay or affordability rate, and the will to pay for the product. The following are the factors that determine the market price of goods as per demand:

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  • Substitute goods

Substitute goods refer to the products that could be used as a substitute for another product. It also signifies that the substitute good offers the same utility to the consumer as the one that is initially in demand.  For instance, Cadbury chocolates and nestle chocolates are substitute goods.

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  • Complementary goods

Complementary goods refer to the products that are supposed to be used together for a particular purpose to experience their benefits. For instance, vehicles and fuel are complementary goods.

  • Income level

The market price of goods also depends upon another crucial factor: the income level of the targeted consumers. A positive income effects when the demand for luxury products increases with the rise in income levels. On the contrary, a negative income effects when a low-quality inferior product, the demand falls with an increase in the income level.

How can we describe the relationship between supply and market price?

Supply can be defined as the number of goods or products manufactured by the producer to be sold during a particular time frame at a specific price point. The supply of a product is directly proportional to its market price. The price of a product goes up when the supply of a product increases. Whereas when the supply decreases, the prices come down. Supply depends on the following under-mentioned factors:

  • The type of production technique

The better technology you introduce, the lesser is the workforce. It can save the production cost and increase both the profit margin and profitability of the product. The supply increases as well because of this.  

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  • Price of substitute goods

The supply of the goods is inversely proportional to the price of the substitute goods. The collection of substitute goods reduces when the price rises high. It happens so because the manufacturers shift their focus and resources to produce the substitute product.  

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  • Price of input factors

The supply of a product reduces when the price of the inputs and raw materials increases. As the price of the raw material increases, the overall production cost rises to give a low-profit margin. As a result, the supply decreases.

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  • Taxes on manufacturing

Taxes have a significant effect on the supply of commodities; as the tax amount rises high to produce a commodity, the profit margin decreases. Therefore,

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How to determine the market price for financial markets?

The most recent price at which financial assets and security are traded is considered the market price. The cost of financial support and security does not depend on supply and demand. Instead, it relies on the interaction of various parties in the finance market, such as investors, dealers, traders, etc.

The market price of a security is determined in a different way. The traders and investors follow the bid and offer a strategy for setting the market price of securities A bid is the price at which a buyer is willing to purchase a security while a price at which the seller is willing to swap the security is referred to as an offer. A buyer can only buy the security at the point when they bid and offer both matches.

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Suppose the value of the financial asset increases from the seller's perspective, and the sale is executed, then the market price increases. If the buyer loses faith in the financial asset and reduces the bid, and the sale is completed, the market price drops.

In the bond market case, the clean price is considered the market price of bonds. Clean price is the recently reported price at which the bond was sold, which ends up to the market price of bonds.