Market Price: Definition, Determination, and Example

What Is Market Price?

The market price is the current price at which an asset or service can be bought or sold. It is determined by the forces of supply and demand, specifically the price at which quantity supplied equals quantity demanded.

Market price is used to calculate consumer and economic surplus. Consumer surplus is the difference between the highest price a consumer is willing to pay and the actual price paid, while economic surplus is the sum of consumer surplus and producer surplus.

Key Takeaways

• The market price is the current price at which a good or service can be purchased or sold.
• It is determined by the forces of supply and demand.
• In financial markets, the market price can change quickly due to bid and offer price changes.

Understanding Market Price

Shocks to supply or demand can cause changes in market price. Examples of supply shocks include interest rate cuts, tax cuts, government stimulus, terrorist attacks, natural disasters, and stock market crashes. Demand shocks can result from events such as increases or decreases in oil and gas prices, political turmoil, natural disasters, and breakthroughs in production technology.

In securities trading, the market price is the most recent price at which a security was traded. It is determined by the interaction of traders, investors, and dealers in the market. A trade occurs when a buyer and a seller meet at the same price, which is represented by bids and offers. Bids are the prices buyers are willing to pay, and offers are the prices sellers are willing to sell at.

The market price in the bond market is the clean price, which excludes accrued interest.

Example of Market Price

For example, let’s assume that Bank of America Corp (BAC) has a $30 bid and a $30.01 offer. Nine traders want to buy BAC stock, with varying bids ranging from $30 to $29.98, while nine traders want to sell at prices ranging from $30.01 to $30.03. If a new trader wants to buy 800 shares at the market price, they will need to buy at the offer prices available. This process continues, with the bid adjusting upward, until the spread is closed and a new market price is established.

The market price is constantly adjusting as buyers and sellers interact with bid and offer prices.