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.
