Supply
The supply of a good, service or labor to a market. Supply has an inverse relationship with price such that an increase in supply decreases prices. For example, if the number of computer science graduates doubles in a year, starting salaries would fall if demand remains constant.Demand
Demand for a good, service or skill set. Demand has a direct relationship with price such that an increase in demand increases prices. For example, if demand jumps for artificial intelligence experts, their salaries generally will rise.Threat of New Entrants
A firm with little competition may be tempted to raise prices. For example, if there is only one restaurant in a small town they could raise prices and locals would need to pay if they want to eat out. One thing that keeps a firm from doing this is the threat of new entrants. If the restaurant raises prices too high, their customers will be unhappy and any new restaurants in town would instantly take most of their business.Threat of Substitutes
Substitutes are goods from a different market that may compete with your products and services. A classic example are restaurants and supermarkets. People who eat out a lot will buy less food at a supermarket. If there is only one restaurant in town, people will stop eating out if quality falls too low or prices rise too high because supermarkets provide an alternative source of food.Bargaining Power of Customers
The bargaining power of customers is the will and ability of customers to fight for lower prices and higher quality. For example, a country with a universal healthcare system may have only one customer for healthcare supplies, the government. This allows the government to push down prices as they have a large amount of bargaining power.Bargaining Power of Suppliers
The will and ability for producers to fight for higher prices and terms that are in their favor. For example, if a lifesaving medication is only produced by one firm, they have great leverage to raise prices.Industry Rivalry
Perhaps the strongest market force is the intense competition between firms. Each firm in a market seeks a competitive advantage by reducing costs, improving quality and/or branding their products. For example, a shampoo company that develops a superior product that makes people's hair look better may be able to charge a higher price than most competitors and still enjoy high sales volumes.Notes
The following forces are known as Porter's five forces: threat of new entrants, threat of substitutes, bargaining power of customers, bargaining power of suppliers and industry rivalry.| Overview: Market Forces | ||
Type | ||
Definition | Competitive pressures in a free market that impact prices and output levels. | |
Related Concepts | ||
