Market dynamics

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Market dynamics refers to price changes on the market. The supply and demand changes over time. That results in price changes. The market dynamics shows the direction and importance of changes in the price.It is a fundamental concept in supply, demand and pricing economic models.Many economists established market dynamics. Arguably, they are most developed in Porter's five forces of competition.

Meaning

Market dynamics means the factors that effect a market. From the theory of economics they would be supply, demand, price, quantity, and other specific terms. From a business standpoint, market dynamics are the factors that effect the business model which involves the applying party. In comparison, the dynamics may be the price of a barrel of crude, total oil production, total national or international stockpiles of oil, the price of other energy commodities, and more for an oil firm. Whereas for a web 2.0 business, a social network for example, market dynamics analytics may be the total amount of free time spent online for both national and international users, amount of money spent online each year, growth of online advertising, and more.

For a prudent business, market dynamics are included in the market analysis of their business plan. Furthermore, these factors affect the business so much that it would be neglectful to exclude them. In conclusion, market dynamics play an important role in the marketing plan of a business. They may also play an important role in other areas such as cost of goods sold, distribution, logistics, and more[1].

The 6 market dynamics

Examples

Let's consider two simple combinations on the competitive market:

  1. supply is stable, demand grows
    • first: price increases, trade becomes more profitable for suppliers
    • then suppliers increases supply to earn more
    • the price declines and finds the new equilibrium
  2. supply is stable, demand drops
    • first: price declines, trade becomes less profitable for suppliers
    • then suppliers decrease supply
    • the price increases and finds the new equilibrium[3]

Changes in the market dynamics

Any change in either the supply or demand for a specific product or group of products forces a corresponding change in the other, and these variances are known as pricing signals. In a free or open market in which no entity has the ability to influence or set prices, the price of a good is determined by the market, which consists of the buyers and sellers, collectively. A single entity or group, therefore, is unable to have a significant effect on market dynamics[4].

How it works

A fundamental concept of macroeconomics is the relationship between supply and demand as the principle forces behind the price of goods and services. Market dynamics consider how price patterns result from ongoing shifts in supply and demand for specific products. Pricing signals occur when a shift in supply or demand results in a commensurate shift in the other.

For example, suppose there is an increase in the demand for product A. This results in a price increase that encourages product A's manufacturers to increase output to meet the new level of demand. The result is in an increase in the supply of product A. Product A's market price should consequently return to its level prior to the initial rise in demand once the supply increase stabilizes demand[5].

Why it matters

Market dynamics are the result of collective market resources and preferences. For this reason, market dynamics are unaffected by the actions of any one individual or company. In fact, individuals act in response to market dynamics instead of causing them.

Economic models attempt to account for market dynamics in a way that captures as many relevant variables as possible. However, not all variables are easily quantifiable. Models of markets for physical goods or services with relatively straightforward dynamics are, for the most part, efficient, and participants in these markets are assumed to make rational decisions. In financial markets, the human element of emotion creates a chaotic and difficult-to-quantify effect that always results in increased volatility.

On the one hand, in financial markets, there are financial professionals who are knowledgeable about how markets work and, therefore, make rational decisions that are in the best interests of their clients based on all available information. On the other hand, there's a sizable number of market participants who are not professionals and possess limited knowledge about markets. This includes small-to-intermediate traders who seek to "get rich quick," or investors who attempt to manage their own investments rather than seek professional advice. For savvy professionals, all decisions are based on comprehensive analysis, extensive experience, and proven techniques [6].

Advantages of Market dynamics

One of the advantages of market dynamics is that it allows businesses to adjust to changes in the marketplace. This helps companies better understand their customer base and make decisions that are tailored to their needs. Additionally, market dynamics can provide an understanding of the competitive landscape, enabling businesses to better anticipate changes and adjust their strategies accordingly.

  • It enables businesses to adjust to changes in the marketplace.
  • It provides a better understanding of customer needs and preferences.
  • It provides a better understanding of the competitive landscape.
  • It helps businesses anticipate changes and adjust their strategies.
  • It helps companies maximize profits and stay competitive in the market.

Limitations of Market dynamics

  • Market dynamics do not take into account external factors such as government policies, natural disasters, and other events that can drastically affect the market.
  • Market dynamics also fail to account for consumer sentiment and emotions. These factors can cause the market to become unpredictable and volatile, leading to sudden and drastic changes in prices.
  • Market dynamics are also limited by the availability of data. This can lead to inaccurate or incomplete models of the market, which can lead to wrong predictions and decisions.
  • Market dynamics can also be limited by the ability of the analyst. Poor analysis can lead to incorrect conclusions and predictions.

Other approaches related to Market dynamics

  • Introduction: Apart from Porters five forces of competition, there are other approaches related to market dynamics.
  • The Resource-Based View of the firm: This approach looks at market dynamics from the perspective of a firm's resources and capabilities. It suggests that firms should differentiate themselves by leveraging their resources and capabilities in order to gain a competitive advantage.
  • The Dynamic Capabilities Approach: This approach looks at market dynamics from the perspective of the firm's ability to respond to changes and opportunities in the market. It states that firms can become more competitive by developing their capabilities and responding quickly to changes in the market.
  • The Network Effects Approach: This approach looks at market dynamics from the perspective of the network of firms, customers, and suppliers. It suggests that firms should build relationships with other firms in order to increase their competitive advantage.
  • The Competitive Dynamics Approach: This approach looks at market dynamics from the perspective of the firms' competitive strategies. It states that firms should be aware of their competitors' strategies and develop strategies to counter them.

In summary, there are various approaches to understanding market dynamics. These approaches all focus on the importance of resources, capabilities, networks, and competitive strategies for firms to gain a competitive advantage.


Market dynamics — recommended articles
Assumptions of economics — Macro marketing — Short run equilibrium — Consumer sovereignty — Demand — Factors affecting demand — Price-Taker — Mobility barriers — Competitive environment

References

Footnotes

  1. ↑ Msefer K., Whelan J.(1996)
  2. ↑ Fischer E., Giesler M.(2016)
  3. ↑ Cusumano, M. A., Mylonadis, Y., & Rosenbloom, R. S. (1992)
  4. ↑ Hämäläinen S. (2015)
  5. ↑ Shukla P.
  6. ↑ Minetti R.,Peretto P.F.

Author: Iwona Maślak

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