In this lesson you will learn what a "market" really means, how "supply" and "demand" jointly shape the price of a good or asset, and why "expectations" held by buyers and sellers, whether in the free dollar market or the coin market, can shift a price even before supply or demand actually changes.
Definitions
Market is any space, physical or online, where buyers and sellers of a specific good or asset come into contact and trade; a market can be a local currency exchange office trading dollars, an online platform for trading gold coins, or the trading board of the Tehran Stock Exchange.
Supply is the quantity of a good or asset that sellers are willing to sell at each price level; the higher the price, the more sellers are usually willing to sell, so supply rises with price.
Demand is the quantity of the same good or asset that buyers are willing to buy at each price level; the lower the price, the more buyers are usually willing to buy, so demand rises as price falls.
Equilibrium price is the price at which the quantity supplied exactly equals the quantity demanded; at this point, no seller is left holding unsold stock and no buyer walks away unable to buy.
Price discovery is the process by which, out of the constant bargaining and trading of buyers and sellers, that equilibrium price emerges at any given moment; it is not a one time event, it repeats with every new trade.
Expectations are what buyers and sellers believe about the future; for example, an expectation that prices will rise in the coming days can push buyers to buy sooner and sellers to hold back from selling today, before any actual change in supply or demand has occurred.
The Mechanism: How a Price Takes Shape
In a free market, no single person or institution writes the price down on paper. Instead, every seller has a floor price below which they will not sell, and every buyer has a ceiling price above which they will not buy. When thousands of such decisions come together, the market automatically moves toward the price at which the largest possible volume of trade can occur, the equilibrium price.
This process has three main drivers. First, a change in actual supply, for example a rise or fall in the quantity of a good available for sale. Second, a change in actual demand, for example a rise or fall in the number of buyers or their level of need. Third, and often faster than the first two, a change in expectations; when news or a rumor leads the market to believe future supply or demand will change, today's price reacts before any real change has happened.
A Worked Example
Suppose that in a hypothetical free currency market, at the start of the day, dollar sellers are willing to sell at 100,000 tomans and above, and buyers are willing to buy up to a ceiling of 100,000 tomans; at this point a large volume of trading occurs and the price settles around 100,000 tomans. Now suppose that at midday, a hypothetical piece of news is released saying imports of an essential good will increase, meaning demand for dollars to finance imports will rise in the coming weeks. Even before any actual importer goes out to buy dollars, some sellers who share this expectation raise their floor price, say to 102,000 tomans, and some buyers, worried the dollar will get more expensive in the following days, become willing to raise their buying ceiling to the same figure. The result is that the equilibrium price shifts from 100,000 to around 102,000 tomans, purely because of a change in expectations, not because of any immediate real change in the quantity of dollars available. This example is entirely hypothetical and is meant only to illustrate how expectations work.
In Iran's Market
In Iran's free currency market, the price of the dollar and other currencies takes shape through actual trades between licensed exchange offices and their customers; the Sana system publishes the average buy and sell rates recorded across these licensed exchange offices nationwide, which is why the figure heard every day as the "free market rate" is in fact an average drawn from scattered trades across these exchange offices, not a single number announced from one source.
A similar mechanism operates in the coin market, with one added layer: besides the everyday supply and demand of buyers and sellers, the Central Bank of Iran periodically changes the quantity of coins available to the market through its official auction and pre sale system. When the market expects greater supply from the Central Bank, that expectation alone, even before an auction is actually held, can affect how willing sellers are to hold onto or sell their coins, another example of expectations acting alongside real supply and demand.
Common Mistakes
One common mistake is believing that the price of any good or asset is "set" by a single institution or person; in a free market, price is the collective outcome of thousands of independent decisions by buyers and sellers, not an order from a single actor, even though some large actors, such as the Central Bank in the currency or coin market, can influence this balance by changing supply.
Another common mistake is ignoring the role of expectations and assuming that price only shifts when there is an actual change in the quantity of a good available or the number of buyers; as shown in the example above, a mere shift in the market's view of the future, before any real change occurs, can move today's price.
Summary
A market is a space where supply and demand, through the constant trading of buyers and sellers, arrive at an equilibrium price; this process is called "price discovery" and it is always in motion, not a one time event. Expectations about the future, even before any real change in supply or demand, can shift that price; we saw this in both Iran's free currency market and its coin market. This is the fourth lesson in the "Sahmino Academy" series; the previous lesson covered "Bank Deposit Interest: Nominal versus Real"; the next lesson will cover the Tehran Stock Exchange from the ground up.
This content is for informational and educational purposes only and should not be considered investment advice. All figures carry a specific validity date and may have changed since; verify information against official, up to date sources before making any decision.
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