How does the market work and why does it crash? Can’t we just keep the same prices throughout?

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How does the market work and why does it crash? Can’t we just keep the same prices throughout?

In: Economics

2 Answers

Anonymous 0 Comments

A market is a place for people to buy and sell goods. And the prices are governed by supply and demand. Say for example that you go to your local farmers market and wants to buy a bag of apples. But there are two vendors selling apples of equal quality. In this case supply is greater then demand. You then go towards the cheapest vendor but before you get to buy the apples the other vendor shouts at you that you get a discount. As you move to the second vendor the first shouts that he will give you a better discount. So when there is greater supply then demand the prices drop. Eventually one of the vendors gives up and thinks that at the price the other vendor is selling his apples he would be better off keeping the apples for himself or sell them at a later time. Thereby he is removing his supply from the market restoring balance. Or another buyer notices the low prices on apples and decides they want some for themselves. So reduced prices decreases supply and increases demand. The entire thing also works the other way around when you have two people wanting to buy the last apples from one vendor. So if demand is higher then the supply the prices increase and when the price increase the demand decreases and supply increases.

But the market is not just for putting a price to different products. But those prices control how we produce and consume things. For example a farmer might go to the farmers market even if he have nothing to sell or buy just so he can see the prices and see what is in demand. If he see that apples are in high demand he might head home and pick his apple tree so that he can fetch a good price for them the next day. Or if apples are in low demand the apples might ripen for another week and fetch a better price the next week. Or more likely he will check the prices in the market before buying seeds for the next round of crops. Similarly a chef might check out the prices in the market before setting on the resturant menu. For example should there be apple or carrot cake for desert? That might well depend on the price of apples compared to the price of carrots.

But what does a local farmers market have to do with the world economy? Most of the global world markets are goods markets. They trade in food, petrolium, coal, electricity, minerals, goods, etc. And they are govorned by the same laws of nature as the farmers market. The prices of goods and their supply an demand relates to each other and controls each other in the exact same way. And then there is the contracts markets, which includes the stock markets. These do not sell goods in the same way but they sell pieces of signed papers, or rather virtual pieces of signed papers these days. But they all work like the farmers market. Traditionally they even had buzzeling spaces filled with crowds of buyers and vendors shouting out prices in order to attract the most attention. A stock market trader might shout out to give a discount on Apple Inc the same way the vendor in the farmers market shouts out to give a discount on apples. The shares they trade is shares of the ownership of companies. If the company makes a profit they will distribute that profit to their owners, ie. shareholders. This is done by paying out dividends where the holder of each share gets some amount of cash or through buybacks where the company buy some of the shares so that the other shareholders will get more money when the company finally pays out dividends. But of course the more likely a company is to make a profit the more people want a piece of that profit so the demand for the stock increases. And as discussed earlier with the apples when the demand increases so does the price. But when a company is unlikely to make a profit and might in fact risk going bankrupt where all the shares becomes worthless forever the demand will drop and supply increases as shareholders wants to get some money from the shares before they become worthless.

Anonymous 0 Comments

In the simplest term, a market is a place where buyers and sellers gather to trade. In a mostly free market, a price is established when a willing seller and willing buyer agree to it for the exchange to happen.

If there are more sellers than buyers, prices generally go down because the buyer can negotiate with many competing sellers. If there are more buyers than sellers, then the price goes up for the opposite reason.

No one “keeps” the same price because the price is established by negotiation and not by a controlling body. If some party, say the government, decides to “keep” prices up, then buyers just don’t buy. If they try to “hold” prices down, then sellers simply don’t sell.