The interaction that shapes a market economy. Market forces are the factors that determine the supply and demand for a product or service, and ultimately its price. These forces include a range of economic, social, and political factors, as well as the actions of consumers and businesses. The most basic market forces are supply and demand, which are determined by the availability of a product or service, the willingness of consumers to pay for it, and the ability of businesses to produce it at a cost that allows for a profit. Other market forces include competition, regulation, and external events that can impact the market, such as natural disasters or changes in consumer preferences. The following are examples of market forces.
The supply of a good, service or labor to a market. Supply has an inverse relationship with price such that an increase in supply decreases prices. For example, if the number of computer science graduates doubles in a year, starting salaries would fall if demand remains constant.
Demand for a good, service or skill set. Demand has a direct relationship with price such that an increase in demand increases prices. For example, if demand jumps for artificial intelligence experts, their salaries generally will rise.
Threat of New Entrants
A company with little competition may be tempted to raise prices. For example, if there is only one restaurant in a small town they could raise prices and locals would need to pay if they want to eat out. One thing that keeps a company from doing this is the threat of new entrants. If a restaurant raises prices too high, customers will be unhappy and new restaurants in town would instantly take some of their business… (caveat being government regulation artificially setting a baseline.)
Threat of Substitutes
Substitutes are goods from a different market that may compete with incumbent products and services. A classic example are restaurants and supermarkets. People who eat out a lot will buy less food at a supermarket. If there is only one restaurant in town, people will stop eating out if quality falls too low or prices rise too high because supermarkets provide an alternative source of food.
Bargaining Power of Customers
The bargaining power of customers is the will and ability of customers to fight for lower prices and higher quality. For example, a country with a universal healthcare system may have only one customer for healthcare supplies, the government. This allows the government to push down prices as they have a large amount of bargaining power.
Bargaining Power of Suppliers
The will and ability for producers to fight for higher prices and terms that are in their favor. For example, if a lifesaving medication is only produced by one company, they have great leverage to raise prices.
Perhaps the strongest market force is the intense competition between companies. Each company in a market seeks a competitive advantage by reducing costs, improving quality and/or branding their products.