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4. The Price of Commodities in The Market

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What Determines the Price of Commodities in The Market?

In the modern economy, most prices are driven, not occurrences, and prices remain very steady across time and place. The following article will guide you on how the price of a commodity is determined by the interaction of its supply and demand.

Various types of Commodities

Commodities come in many various forms. Examples of energy commodities are crude oil, natural gas, and agro. Commodities also include grains like cereal, castor seeds, and wheat, while soft commodities are in a different category and include things like cotton, coffee, and rice.

Determining the price of commodities

Price is the consequence of the exchange of supply and demand. Simply put, demand refers to what the consumer wants and how much. Supply means how much quantity a producer can have to fulfill a consumer’s requirements. This means that neither market force demand nor supply is more profitable, but their exchange leads to the determination of the price of the commodity. The resultant market price depends on both major market components. Goods or services are exchanged whenever buyers and sellers can agree on a price. When an exchange takes place, the agreed price is called the “equilibrium price” or “market/demand clearing price”.

Price Equilibrium: How Do Supply and Demand Influence the Commodity Price?

As we all know, there is no single consumer profile and no single type of supplier, which indicates it is a market. Consumers collectively mandate a specific amount of a good, and suppliers then try to supply that amount. The price that the consumer is accommodating to pay, and the supplier is willing to supply is called the equilibrium price. This is how the commodity price is determined. The market is in equilibrium when the abundance mandated equals the quantity delivered.

Who are the participants and how are the commodity prices determined?

If you want to know how the prices of goods determine in India, you should know the participants. The actions of these participants are the driving force behind market prices. There are two types:

  1. Hedgers
  2. Speculators

Hedgers are manufacturers/industries that have a real need to acquire a large number of raw materials. They have to obtain them at relatively stable prices. For example, the construction industry requires steel. To protect against price changes, industries can make future purchases, guaranteeing that future steel demand is met at the current price. In this way, a predictable price model is created and evaluated by producers and industry, which supports skillfully planning future activities.

Speculators in India are those who have no genuine need for goods in India. They are only investors looking to profit from price changes. They generally trade in commodities, buying cheap goods and selling them when prices increase.

When the demand or supply changes, the equilibrium price also switches. For example, a good climate usually rises the supply of grains and oilseeds, and the products become available at different prices. If the demand for the product does not increase, there is a movement along the demand curve to a new equilibrium price to release excess supply from the market. Consumers buy more, but only at a lower price.

Evolution in Equilibrium Price

Evolutions in supply and demand can be short-term or long-term changes. Weather usually affects market prices in the short term. Differences in consumer preferences can have either short-term or long-term consequences on prices, depending on the good or service, such as whether it is a luxury or a commodity. Demand for luxury goods can vary in the short term due to changing styles or snob attraction, while consumer goods have a durable or long-run demand curve.

Another important factor affecting market prices is technology. An important effect of technology in agriculture is the immediate external shift of the supply curve, lowering the cost of production per unit. However, if aggregate demand does not expand enough to absorb the additional goods produced at lower costs, the long-term effect of the technology on the market will be a more inferior price. A quick shifting supply curve combined with a slower-moving demand curve usually downcast prices for agricultural produce relative to prices for manufactured goods.

At Last- The Consequences

Without a reduction in supply, the price effect results from a movement along the supply curve to a lower equilibrium price where supply and demand are similarly in equilibrium. For prices to increase, producers must decrease the amount of hard red spring wheat brought to market or find new sources of demand to replace consumers who have left the market due to changes in preferences or demand.

Isn’t it impressive how supply and demand work to arrive at an agreed-upon price point? While supply and demand are the main factors that determine price, there are other factors to consider. Commodity prices can also be affected by government rules, the level of competition between suppliers, natural disasters, and military competition. That’s why – when we talk about the laws of supply and demand – we say that “other” factors are supposed to be constant.

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