How Prices of Commodities are determined

Classroom

oi-Monika Nihalani

By Monika Nihalani

Published: Monday, May 30, 2011, 17:06 [IST]

A very common misconception people have in their minds is that the exchange determines the the prices of commodities. This is entirely untrue.

Prices are determined solely by supply and demand conditions. If demand is more than supply, that will result into higher prices and vice versa.

Demand for commodities is the amount of particular goods or commodities that a consumer will want to purchase at a given price. The supply of commodities is the amount that is carried over from previous years of production plus the amount that is being produced during the current year.

Typically, more supply lead to fall in prices. Supply always has inverse relationship with the prices of commodities. On the opposite, more demand will lead to rise in prices.

The orders placed by buyers and sellers from all sources are channeled to the exchange for execution. This actually determines the prices of commodities. The orders of buy and sell are actual purchases and sales made on the exchange and same gets recorded over a vast network.

This is like a two-way auction which goes on continuously during trading hours, where buyers and sellers are in large volume. And, the role of commodity exchange is to provide an organized platform where traders can freely buy and sell various commodities as per their interest.

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