The question
"Who decides the price of a tomato? Nobody announces it, yet everyone in the mandi seems to know it by ten in the morning."
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Home reading
Nobody sets the price
Walk into a sabzi mandi at six in the morning. Tomatoes are ₹40 a kilo. By eleven they are ₹25. No official announced the change. No committee met.
What happened is that hundreds of buyers and hundreds of sellers each made their own small decision, and the price moved to where those decisions balanced.
That is a market: a place where the price is not decided by anyone in particular, but discovered by everyone together. The share market is the same idea with company ownership instead of vegetables, which is why this chapter comes before any of the others.
Demand — the buyers' side
Demand is how much people want to buy at a given price.
Tomatoes at ₹100 a kilo: most families buy less, or cook something else. Tomatoes at ₹15: the same families buy extra and make a week's worth of curry.
The rule, and it holds nearly everywhere: when the price falls, buyers want more.
Demand also moves for reasons that have nothing to do with price — a festival week, a wedding season, a recipe suddenly popular. When more people want tomatoes at every price, the whole demand has shifted upward.
Supply — the sellers' side
Supply is how much sellers are willing to bring at a given price.
At ₹100 a kilo, every farmer who can possibly harvest tomatoes does so, and traders bring them from three districts away. At ₹8, many will not bother — transport alone costs more than that.
The rule, and it runs the other way: when the price rises, sellers bring more.
Supply also shifts on its own. A good monsoon means more tomatoes at every price. A truck strike means fewer, whatever the price.
Where they meet
Put the two together and the price settles where the quantity people want to buy equals the quantity sellers are willing to sell.
If the price is too high, tomatoes sit unsold. Sellers who must clear stock before evening lower their price. That is what you watched happen by eleven o'clock.
If the price is too low, tomatoes vanish by seven and buyers arrive to an empty stall. Sellers notice, and tomorrow's price is higher.
This correction happens without anybody organising it, which is what makes it worth studying. Nobody in the mandi is trying to find the right price. They are each trying to do well for themselves, and the right price is what falls out.
Four things that move the price, and which side each one moves
| What happens | Which side moves | Price |
|---|---|---|
| Heavy rain destroys the crop | supply falls | rises |
| A festival week | demand rises | rises |
| A bumper harvest | supply rises | falls |
| A health scare about tomatoes | demand falls | falls |
Notice the shape. Price rises when something becomes scarcer or more wanted; it falls when something becomes more plentiful or less wanted. Every price movement you will ever study is one of those four, including in the share market.
The same thing, with shares
A company's share behaves exactly like the tomato.
More people want to buy Infosys shares than sell them, so buyers offer a little more to get filled. The price rises.
More people want to sell than buy, so sellers accept a little less to get out. The price falls.
There is one important difference, and it is the reason share prices move much faster than tomato prices. A tomato's demand comes from people who want to eat it today. A share's demand comes from people forming a view about a company's future. Views change in seconds, harvests do not.
That is why a share price can move on a news headline while nothing about the company has actually changed yet.
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Worked example
Onions, over one week in a mandi.
Monday. Normal supply, normal demand. Price ₹30/kg.
Tuesday. News that rain has damaged the crop in a growing district. No onion has disappeared from this mandi yet — but traders expect fewer next week and hold back stock. Supply available today falls. Price ₹42.
Thursday. Households, having read the same news, buy extra to store. Demand rises on top of the supply fall. Price ₹55.
Sunday. The damage turns out smaller than feared, trucks arrive, and households who already stocked up buy nothing. Supply rises, demand falls, both at once. Price ₹28 — below where the week started.
Look at Tuesday again. The onions had not gone anywhere. The price moved on what people expected. This is exactly how a share price behaves on news, and it is why the week can end lower than it began even after a genuine scare.
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⚠️ The common mistake
"The seller decides the price."
A seller can ask any price. Whether anyone pays it is not up to them.
Ask ₹100 when the mandi is at ₹40 and you will carry your tomatoes home. That is the market refusing the price, and it happens the same way to a company whose shares nobody wants at the price being asked.
A price is not a decision. It is an agreement — and it takes two.
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Check yourself
- Explain in one sentence why tomatoes are cheaper at eleven than at six.
- For each, say whether demand or supply moved, and which way the price went: a truck
strike; a festival; a bumper harvest.
- More people want to buy a company's shares than sell them. What happens to the price, and
why?
- In the onion example, why did Tuesday's price rise when the same quantity of onions was
physically present in the mandi?
- A shopkeeper marks tomatoes at ₹100 when the mandi price is ₹40. What happens, and what
does it tell you about who sets a price?