Market Forces

Article byPrakhar Gajendrakar
Reviewed byDheeraj Vaidya, CFA, FRM

What are Market Forces?

Market forces refer to the forces that determine the prices of goods and services and the functioning of consumers and producers in the market. It causes short-term and long-term fluctuations in the market.

It explains the increase or decrease in the price in reaction to the changes in supply and demand and other factors in the market. It is a naturally occurring phenomenon, given the nation follows a free market economic system.

Key Takeaways

  • Market forces in economics are the factors influencing the price and availability of goods and services. Fundamentally, it explains how market economies work.
  • One of the major ones is the free market force of supply and demand. Few of such forces are not quantifiable, like human emotion, psychological urges to buy or consume a product, etc.
  • Government intervention and other factors like social, demographic, cultural, economic, technological, political, and legal forces regulate an economy’s supply and demand.
  • The weather can impact the supply of a product. For instance, agricultural loss due to extreme weather might cause the supply curve to move to the left. It explains why prices of vegetables and substitutes rise during such circumstances.

Market Forces of Supply & Demand Explained

Market forces in economics indicate the importance of understanding the supply and demand concept. These market forces influence the price of goods and services. For example, when the supply of a product decreases and demand increases, the market force causes an increase in the price in reaction to the change in supply and demand. Similarly, if the supply increases and demand decrease, the price of the product decreases. Furthermore, in a  market equilibrium scenario, market forces will be in a balanced state.

Market forces of demand and supply

Adam Smith, a prominent economist, introduced the invisible hand concept, which is also considered one of the most important market forces. It is also an invisible or unobservable force that plays a key role in changing prices and directing demand and supply in a free market to reach equilibrium. It points to how profit motive and individuals acting in their self-interest contribute to the social benefits and public good.

Other important forces influencing the prices and availability of resources along with supply and demand are government intervention, international transactions, speculation and expectation, human emotion, etc. In the above case of changes in supply and demand, government intervention can control the price by placing a price ceiling or floor. The government intervention generally can be fiscal policies controlling the level of taxation and government spending and monetary policies changing interest rates to influence the free market events. When it comes to human taste, consumers purchase the product they like more. In such cases, consumer tastes also influence the demand. Historical data and psychological forces explain consumer tastes.

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Example

William is an innovator, and he lives in a small village. Concerned about the infertile soil and dying plants in his village, he invents a new pesticide and introduces it to the local market for $2 per bottle. Slowly when people started to discover its benefits, the product became a hit in his village. Soon, people from other villages visited the local market of William’s village to buy the product. William, who wasn’t expecting such a response, got a bigger order of 500 bottles of pesticides from a retailer.

Given the time and volume of demand, William tries hard but only fulfills to supply of 300 pesticide bottles. After a few months, there was a huge demand for the product in the market. Farmers and other agricultural companies from different parts of the state visited his place to buy it. The demand is outgrowing the supply, farmers are ready to pay as much as $10 per bottle, and the companies are willing to pay William a lump sum. In this example, huge demand for the product act as the critical force that is pivotal in pushing the price of William’s pesticides to increase.

Frequently Asked Questions (FAQs)

What is the meaning of market forces in economics?

It refers to the forces influencing the price and quantity of goods in a market. In economics, it is also known as market dynamics, describing how they eventually affect a nation’s economy and growth. They are limitless and can impact foreign markets and international trade transactions. Such forces vary from country to country based on social, demographic, cultural, economic, technological, political, and legal factors.

What are the four market forces?

The four major forces that play a key role are:
 
–          Supply and demand
–          Government intervention
–          Human emotion and consumer buying behavior
–          Technological advancement

What are market forces examples?

One of the examples is the phenomenon of the price rise of certain commodities in the winter season. For instance, the price of winter wear rises due to increased demand. The effect of cold weather can affect the orange crop, reducing the supply and increasing the price of oranges and orange juices. During cold weather, people travel to places with tropical climates, and holiday packages’ price to tropical destinations also increases. When the winter season ends, all these scenarios take reverse.

This has been a Guide to Market Forces. We explain its definition and meaning in economics, examples, forces of supply and demand, etc. You may learn more from the following articles –

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