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How the markets work?

How the markets work?

You visit the market when you want a product and you know it is available in the market. A manufacturer makes a product available in the market when he/she knows you want a product. Isn’t it? This is a cyclic process, overall. The supply of a product completely depends on the demand for the same. This is how the markets work – via demand and supply chain. It is the demand for a particular product in the market that influences the supply of the same.

If the supply is enough but demand is less, the stocks are unnecessarily wasted. On the other hand, if the supply is less but the demand is high, customers lose faith in the brand. As a result, manufacturers or producers lose their loyal customers. There are many factors that affect the demand as well as the supply of a product in the market, which has been discussed below:

Factors Affecting Demand

If you really want to understand how the markets work perfectly, it is important to know the determinants that will influence the demand for products and services in the markets. Some of them include:

  • Price of the product – The price of a product is an important factor. If the price of a product increases, the demand decreases while the fall in prices leads to increase in the demand.
  • Price of the substitute – The price of an alternative product is also an important factor. For example, if toothpaste X is priced higher than toothpaste Y, it is likely for customers to choose the latter, thereby leading to the fall in the demand for X.
  • Income – The affordability of the goods available in the market determines is a product will sell more. If the market is located in an area where the income status of residents is average, very expensive products won’t sell.
  • Tastes and preferences – While talking about how the markets work well, the most important factor is the preference of customers. Hence doing a proper market research before opening a store or mall becomes important. If your product is not liked, the demand will fall automatically.

Factors Affecting Supply

The supply of a product is very important when you know customers are interested in buying it. Like demand, however, the supply of a product is also affected by several factors. Some of them include:

  • Price – While demand is inversely proportional to the price of the product, the supply of it is directly proportional to the price. This means the higher price will mean more supply. As the prices rise and the customers are addicted to your products, they will surely buy them irrespective of the price rise.
  • Cost of production – The cost of a product, if high, will lead to the decrease in supply and vice-versa. This is because if the cost of production increases, the price of the product will become more than the market price, resulting in no buying. Hence, supply gets reduced.
  • Technology – The use of technology will mean more production, thereby enhancing the supply of items.
  • Transport Cost – Better transportation of products to markets will mean improved and increased supply of products.

Once the demand and supply chain gets balanced, the market works robustly. Hence, now when you know how the market works, make sure you take care of the demand and the supply balance, thereby keeping in mind all the factors influencing the chain.

Global Banking & Finance Review


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