How markets set prices

Buyers, sellers and price

Every market has buyers and sellers, and a sale happens only when both agree on a price: the sum a buyer will pay and a seller will accept. Often they negotiate, or bargain, to reach a price both accept, just as two classmates acting out a guava sale might do in a skit. In some markets, such as malls, supermarkets, chemists and online stores, prices are printed or fixed, so there is little bargaining.

The guava example

Imagine a seller who wants ₹80 a kg for guavas. A buyer who finds this too high offers a lower price; the seller may refuse an offer that brings no profit; and the two bargain until they meet, or no sale takes place. The book shows three cases. At ₹80, most buyers walk away and guavas are left unsold. At ₹20, crowds rush in, the cart empties fast and the seller makes a loss. Over time the price settles near ₹40, not too high for the buyer and not too low for the seller. From these cases the seller learns roughly how many guavas buyers want, and brings about that many next time.

Demand and supply

When there are many buyers and sellers, two forces settle the price. Demand is the quantity buyers are willing and able to buy at a price at a given time; supply is the quantity sellers are willing and able to sell. Together, the amount offered and the amount wanted fix a price high enough for sellers and low enough for buyers. That is why vegetables get cheaper late at night, when sellers want to clear stock that will spoil, and why woollens are discounted at the end of winter, when few people want them. When the supply of onions falls in some seasons, their price rises; if sellers hold back stock, the government may have to act, as described in role of government in markets.

When there is no ready market

Some products have few buyers and sellers. Aakriti, a professional artist, paints in oils on canvas; people admire her work, but she struggles to find buyers and to decide what price to ask. Unlike guavas, artwork has few local buyers and sellers, so its price is hard to judge. Today artists can reach buyers through online stores, social media, exhibitions and art fairs, and by taking orders directly.

More than buying and selling

Markets also carry signals. When many consumers ask for refrigerators that use less electricity, retailers and wholesalers order more of them, and producers start making energy-saving models, which benefits society too. Markets build trust as well: families keep the same tailor, jeweller or doctor for decades, and many settle a monthly account with the local grocer. Ima Keithal, the Mothers’ Market of Imphal, where about 3,000 women own and run every shop, gives thousands of families an income and brings people of different communities together. In south India, sellers of haldi and kumkum add a little of each at no charge, as a sign of good wishes.

Why it matters

Understanding how prices form helps us shop wisely, bargain fairly and see why prices change with the seasons. The kinds of markets are in types of markets, and the government’s part in role of government in markets. Answers to every question are in the NCERT solutions for Chapter 12; see also the full Chapter 12 notes.