The amount of money for what an asset can be sold in a market
Written byCFI Team
What is Market Price?
The term market price refers to the amount of money for what an asset can be sold in a market. The market price of a given good is a point of convergence of the demand and supply for that good. It is an important aspect of calculating consumer surpluses, economic surpluses, etc. The market price of a good or service is subject to reevaluations due to fluctuations or shocks in the demand and supply factors.
Summary
- The term market price refers to the amount of money for what an asset can be sold in a market.
- The market price of a commodity is closely linked with the demand and supply factors of the commodity.
- For a financial asset or security, the most recent price at which it was traded is considered to be its market price. It is different from the current bid and offer prices on the market.
Relationship between Demand and Market Prices
Demand can be defined as the consumer’s willingness to pay for a certain product at a certain price. Its essential elements comprise of its desire, ability to pay or affordability, and the consumer’s willingness to pay. When the price of the commodity rises, its demand falls, and when the price of the commodity falls, its demand rises.
Prices of substitute goods
Substitute goods are goods that can be used in place of one another, which means that they provide similar utility for the consumer. In such a case, the demand for a good is directly related to the price of its substituted good. For example, co*ke and Pepsi are substitute goods.
Prices of complementary goods
Complementary goods are goods that are used together to satisfy a want. In such a case, the demand for a good is inversely related to the price of its complementary good. For example, a vehicle and fuel are complementary goods.
Incomes levels
The demand for luxuries increases with a rise in income levels of the consumer base. Thus, the income effect is considered to be positive. In the case of inferior goods, which are low-quality products, the demand falls with an increase in the income levels of the target market. Thus, the income effect is said to be negative.
Relationship between Supply and Market Prices
Supply refers to the quantity of a commodity that a producer offers for sale at a given price at a given point of time. A commodity’s supply is directly related to the price of that commodity. When the price of the commodity rises, its supply also increases, and when the price of the commodity falls, its supply falls. Supply depends on the following factors:
Type of production technology
A commodity’s supply is directly related to the production technology used by the industry. An improvement in production technology leads to a fall in marginal cost. It increases the profit margin or profitability producers, as a result of which supply rises.
Prices of substitute goods
A commodity’s supply is inversely related to the price of its substitute goods. When the price of a substitute good rises, its supply falls. It is because the producers are tempted to divert their resources to the production of that substitute.
Prices of input factors
A commodity’s supply is inversely related to the price of inputs required in the production of that commodity. An increase in the price of inputs leads to an increase in the marginal cost. It causes a decrease in the profit margin of the producers, and thus, supply falls.
Taxes on production
A commodity’s supply is inversely related to the taxes levied on its production. An increase in taxes leads to an increase in the marginal cost. It causes a decrease in the profit margin of the producers, and hence, supply falls.
Market Price for Financial Markets
For a financial asset or security, the most recent price at which it was traded is considered to be its market price. Rather than strictly depending on demand and supply, the market price of securities is the result of the interaction of various parties in a financial market, i.e., investors, traders, dealers, etc.
The market price of a security is different from the current bid and offer for that security. A bid is the price at which investors in a market are willing to spend for a security, while an offer is the price at which a seller might be willing to sell. A trade can only be executed when the bid and offer prices of a security are the same.
If a buyer’s faith in the real value of the security decreases, they may reduce their bid and vice versa. Similarly, if the value of the asset increases in the eyes of the seller, they may increase the offer price and vice versa. As sellers execute sales, the market price drops. As buyers execute more sales, the market price rises.
In the bond market, the last reported price at which a bond was sold is considered to be the market price. It is also known as the clean price.
Related Readings
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