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Factors that affect the market price of goods include supply, demand, competition and substitutes. Depending on the market, there could be other factors such as currency exchange rates, environmental concerns and political instability. The fluctuation of price also differs from market to market.
The supply level of a product is one of the main factors that affects its market price. If the product, or raw materials to create this product, are in limited supply then the market price will increase as the supplies decrease. For example, when the supply of oil declines, not only does the cost of oil increase, but so do the products that use oil as a raw material. In contrast, when supply levels continue to increase, the market price will most likely decrease or remain the same; the market price may remain the same if the company does not want to pass on the savings to its consumers.
Demand for a product also significantly affects its market price. If the demand increases with the supply remaining the same, then the prices will most likely increase. For example, if a wedding photographer starts experiencing a higher demand for her services, then she may be more inclined to increase her prices. If both the demand and supply increases simultaneously, then there may not be a change in price. This can be seen in the book industry, for instance, when a novel becomes a bestseller and more books are printed in order to satisfy the demand without an increase in price. Demand levels can be affected by changes in the 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 since customers are unable to make purchases elsewhere, while markets saturated with competition often see lower prices. It is often the case that more competitors within a market will result in businesses becoming more efficient in order to offer competitive prices.
Availability of substitutes is an important factor of price as well — if a product's price becomes too high, then consumers will switch to a substitute. For example, if the cost of gas becomes too high for consumers to use their cars, then they may start riding bikes or taking public transportation in order to avoid the added expense. The more substitutes that are available, the more likely those customers will become price sensitive, making demand decline as the prices rise. If there is a low availability of substitutes, then businesses can generally set higher prices since customers do not have any other options.
One of the biggest factors setting prices these days seems to be a simple maxim -- charge as much as the market will bear. While companies tend to defend their pricing claiming they spend so much on research and development, marketing, labor and raw materials that they have to charge a certain amount to make a profit.
However, one might argue that's rarely the case. For example, let's say a company manufactures tennis shoes and claims it has to move production overseas to cut labor costs so it can offer goods at competitive prices. In other words, cheaper labor costs are justified with the claim that consumers will save money.
The only problem with that is the costs to
consumers for products appears to differ very little -- or actually increase -- after production is moved to cheaper labor markets. In that instance, isn't it reasonable to assume that companies simply made the decision to use cheaper labor to increase profits? They're not charging less for their products, so that's a reasonable explanation of why they've moved production.
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