What Determines Commodity Prices

There are a number of factors which can affect the price of certain commodities such as metals like gold and silver as well as natural gas. Most of the time people bid, buy, and sell these commodities in what are referred to as “trading pits”. Supply and demand is what determined the price of commodities for the most part. The exchange of goods and services happens when both the buys and sellers can agree on a fair and reasonable market price. The price which is charged the buyer is referred to as the “equilibrium price”. The final price which buyers charge sellers is the result of what people are willing to pay and what suppliers are willing to sell at; this is something which frequently changes because a number of factors, including scarcity of the product in question.

When the price of a certain commodity is at the point here both buyers and sellers are satisfied, it is said to have reached the point of balance or equilibrium. Product shortages which occur when a seller is unable to provide the products or services which consumers are anxious to spend their money on. This happens when the quantity of demand for a certain commodity is greater than the actual supply of it. The price of a commodity usually goes up when there is a shortage of a certain product due to the fact that producers must take in more money in order to keep supplying the public with what they demand, whether it is something like natural gas or food.

In the event of a shortage the price will rise to the point where both consumers and producers are both satisfied. When the shortage is no longer an issue and the producer has an easier time supplying the public with a certain product, the price will go down. A surplus of a certain commodity which is when a producer has too much of something, would result in the prices going down because they will need to clear the commodity from the market as soon as possible. Consumers will start to buy more of the product because of the significantly lowered price until it is once again at equilibrium between the seller and buyer.

Even when the market price is at equilibrium it does not guarantee that everyone will be satisfied, because there will always be certain people who will not want to pay the price of the product in question until the price has been lowered. A commodity is said to be at equilibrium when a majority of buyers and the seller are in agreement with the price being charged. When a company that sells certain commodities raises their prices too much it will attract competition from other companies that are willing to sell the product for less. When there is a change in supply or demand for a certain commodity the equilibrium price will change as well. Whenever too much of something is being produced, such as grain, sellers are anxious to clear it from the market by offering lower prices which results in equilibrium.

Consumers will usually only tend to increase their spending on a certain commodity if the price on it is lowered, though that is not always the case. The market price of a commodity can also be influenced by a change in consumer preferences. For example, buyers can change what they tend to purchase as far as food goes such as in the case of those who purchase Canadian wheat, preferring Canada Prairie Spring over other types. When consumers shift their preferences to something else, supply for whatever they are buying more of shifts as well. On the opposite side of the spectrum, a decreased preference for a commodity can result in a lower price because of the lack of demand. When supply for a certain commodity does not increase or decrease, the result is usually a lower equilibrium price.

In order for the price of a commodity to increase the producers will have to find a new source of demand for it or they will have to reduce the quantity of it so that the demand for it will go up. Supply and demand can either go through short or long run changes. Weather is just one factor that can affect the price of a number of commodities, but only in the short run. Changes regarding consumer preference can have a long or short run effect depending on the commodity. Luxury goods often experience short term shifts in demand because of frequently changing styles or trends which occur.

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