WallStreetMojo

WallStreetMojo

WallStreetMojo

MENUMENU
  • Blog
  • Free Video Tutorials
  • Courses
  • All In One Bundle
  • Login
Home » Investment Banking Tutorials » Economics Tutorials » Market Price

Market Price

By Dheeraj VaidyaDheeraj Vaidya, CFA, FRM

What is the Market Price?

Market price is the current price at which a product or a service can be bought or sold and therefore traded in the market place at a certain point of time. It exists in anything and everything we need in our daily lives – travel, food, work, and leisure.

There are two theories strongly supporting this concept. The first one is the economic theory which gives away the fact that the price at which forces of supply and demand meet is called a market price. The second one, the finance theory suggests the two prices, ask and bid, usually prevalent in stock exchanges, the difference is termed as a spread or a margin. Only when a bid is equal to an ask, there is a defined market price.

Market Price

Concept of Market Price

1 – Economic Theory

  • Broadly, the market price is the point of intersection of the supply for any product or service and it’s demand. It forms a great base and is of significant importance in microeconomics study. It is in equilibrium only under the most efficient and rational expectations.

Market Price

  • In the figure above, the X-axis represents the Output or Production of an asset or a service. The Y-axis represents the corresponding Price for that. The point where the demand curve (downward sloping) and supply curve (upward sloping) meet is termed as a market price. It can be found by looking into things like market trends, the number of existing buyers and suppliers, competitors and so on. However, putting it numerically can be a difficult task because it does not use our day to day formulas.
  • A shift in either the supply or demand, due to any factor/s, will affect the market price. Keeping demand constant, an increase in supply results in a decrease in the price and vice versa. The concept is easy to understand – higher the production, cheaper the product or service. Similarly, if supply is constant, an increase in demand leads to an increase in the price and vice versa. If anything of the above scenarios happens, the business shifts the market price to bring in line with the changing supply and demand.
  • Demand for any asset or service might change due to various factors – tastes and preferences, income, changes in prices of related products, future expectations, etc. Similarly, the supply might fluctuate due to – natural conditions, changes in factor prices, government policies, number of suppliers and the nature of the product.

2 – Finance Theory

  • It is the last price at which a security, usually called a share, is traded. Various parties – investors, brokers, dealers, and traders interact with each other to make this trade happen in the market. In simple terms, for a share to be bought or sold, there should be a buyer and a seller who should agree on the same price at the same point in time.
  • Buyers quote a bid, the price which they are ready to pay for a share; and sellers quote an ask/ offer, the price at which they want to sell the share. If it equals, the trade goes through and the share transfer happens subsequently. If not, there exists a difference between the two called a spread or a margin. Till that negates, or till the dealer/ broker agrees to pay the difference – trade does not go through.

Difference Between Market Price and Normal Price

Below are the key differences between the two –

Market Price Normal Price
It is temporary – it can be more or less than the average cost of production. Normal price is permanent –usually equal to the average cost of production.
There exists an opportunity for supernormal profits if the price is more than the average cost of production. If it is less, there can be losses as well. There is only a normal profit over the long run since the normal price is always equal to the average cost of production.
Supply stays constant in a very short period, while demand can change. In the long run, supply plays a key role in price determination.
It exists for all goods, even non-reproducible like arts, antiques. Normal price only exists for reproducible goods.
It may/ may not change frequently. Normal price remains stable over the long run.

Importance

In today’s world, prices are termed in some forms of currency as compared to barters or exchange systems prevalent in the older times. Prices can be replaced by vouchers, stamps, or bitcoins, but generally – the price of an asset or service is it’s worth in currency – digital or print.

Popular Course in this category
Sale
Investment Banking Training (117 Courses, 25+ Projects)
4.9 (831 ratings)
117 Courses | 25+ Projects | 600+ Hours | Full Lifetime Access | Certificate of Completion
View Course

Example

For a stock ABC, the bid and ask maybe $45.50 and $45.51. In that case, the trade would not happen. A trade-only takes place if a buyer interacts with a seller. To make that happen, there is a need for dealers and brokers. In the above scenario, if the buyer deems fit to increase the bid or the seller feels to decrease the ask to the respective prices, the share would trade or it will remain untraded.

Conclusion

  • It is important in the aspect that it is the most effective price at which an asset or a service is traded. Knowing this price is key to knowing how to get a trade, increase revenue, reduce costs and expand the business. There may/ may not be multiple markets for the same product or service, that depends and varies on the offerings and the industry.
  • Having said that, in the practical world, there are a lot of external factors not under the control of any individual, business or even industry – monetary and fiscal policies, law and regulations, quotas and tariffs, trade barriers, cartels and other restrictions which shape the market price on a real-time basis. All these factors impact the market price of the good to a greater extent.

Recommended Article

This has been a guide to What is Market Price. Here we discuss the concept of market price along with its importance and example. You can learn more about from the following articles –

  • Differences between Economies of Scale vs Economies of Scope
  • Supply Curve Uses
  • Cost Basis
  • Marginal Utility Definition
0 Shares
Share
Tweet
Share
Primary Sidebar
Footer
COMPANY
About
Reviews
Contact
Privacy
Terms of Service
RESOURCES
Blog
Free Courses
Free Tutorials
Investment Banking Tutorials
Financial Modeling Tutorials
Excel Tutorials
Accounting Tutorials
Financial Statement Analysis
COURSES
All Courses
Financial Analyst All in One Course
Investment Banking Course
Financial Modeling Course
Private Equity Course
Venture Capital Course
Excel All in One Course

Copyright © 2021. CFA Institute Does Not Endorse, Promote, Or Warrant The Accuracy Or Quality Of WallStreetMojo. CFA® And Chartered Financial Analyst® Are Registered Trademarks Owned By CFA Institute.
Return to top

WallStreetMojo

Download Coursera IPO Financial Model

By continuing above step, you agree to our Terms of Use and Privacy Policy.
WallStreetMojo

Free Investment Banking Course

IB Excel Templates, Accounting, Valuation, Financial Modeling, Video Tutorials

* Please provide your correct email id. Login details for this Free course will be emailed to you

Book Your One Instructor : One Learner Free Class
WallStreetMojo

Free Investment Banking Course

IB Excel Templates, Accounting, Valuation, Financial Modeling, Video Tutorials

* Please provide your correct email id. Login details for this Free course will be emailed to you

Let’s Get Started
Please select the batch
Saturday - Sunday 9 am IST to 5 pm IST
Saturday - Sunday 9 am IST to 5 pm IST

This website or its third-party tools use cookies, which are necessary to its functioning and required to achieve the purposes illustrated in the cookie policy. By closing this banner, scrolling this page, clicking a link or continuing to browse otherwise, you agree to our Privacy Policy

Login

Forgot Password?

Coursera IPO Financial Model & Valuation Free Download