Wednesday, January 14, 2009

Logic behind market price

A question always comes to our mind that how prices are decided in the market place. A buyer goes to the motive with the objective of getting product at lower cost where as a seller comes to the market with the objective of earning maximum profit. But as a seller, cannot charge higher price in a competitive market according to his whims and wishes. He has to take into account other player selling the similar product in the market as any one sided increase in the price can lead to loss of market share. At the same time a buyer cannot demand a product at cost lower than its manufacturing expenses. So over a period of time, equilibrium is reached where interest of both buyer and supplier is taken care.

To tackle the problem of low price these firms form a cartel where they fix the minimum price of at which a firm can sell the product in the market. Opposite happens in the sellers market where they decide the maximum price they are going to offer for a product. Some where down the line a equilibrium gets establish.

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