Market and Market Relations

The word market today is used in a number of ways. There is a stock market and an automobile market, a retail market for furniture and a wholesale market for furniture. There can be black markets, where a good is exchanged illegally and virtual markets, such as eBay, in which buyers and sellers do not physically interact during negotiation. There can also be markets for goods under a command economy despite pressure to repress them. One person may be going to the market; another may plan to market a product.

A market may be defined as a place where buyers and sellers meet, goods or services are offered for sale, and transfers of ownership occur. A market may also be defined as the demand made by a certain group of potential buyers for a good or service. The terms “market” and “demand” are often used interchangeably; they may also be used jointly as market demand.

A market emerges more or less spontaneously or is constructed deliberately by human interaction in order to enable the exchange of rights (e.g. ownership) of services and goods.

The historical origin of markets is the physical marketplace which would often develop into small communities, towns and cities. In this sense, a market is a physical location where buyers and sellers converge. Usually this is done in town squares, sidewalks or designated streets and may involve the construction of temporary structures (market stalls).

Individual consumers, business firms, and government agencies participate in the market in order to achieve certain goals. Market participation is motivated by the desire to maximize personal utility (consumers), profits (business firms), or the general welfare (governments).

There are two distinct markets: product markets and factor markets.

Factor market is any place where factors of production (e.g., land, labour, capital) are bought and sold.

Product market is any place where finished goods and services (products) are bought and sold.

Neither a factor market nor a product market is a single, identifiable structure. The term “market” simply refers to any place where an economic exchange occurs – where a buyer and seller interact. The exchange may take place on the street, in a taxicab, over the phone, by mail, or through the classified ads of the newspaper.

In some cases, the market used may in fact be quite distinguishable, as in the case of a retail store. But whatever it looks like, a market exists wherever and whenever an exchange takes place.

The market, therefore, is simply a place of medium where buyer and seller get together; which market they are in depends on what they are buying or selling.

As an example of a market, consider that in which oil is bought and sold – the world oil market. The world oil market is not a place. It is all the many different institutions, buyers, sellers, brokers and so on who buy and sell oil. The market is a coordination mechanism because it pools together the separate plans of all the individual decision makers who try to buy and sell any particular good. Decision makers do not have to meet in a physical sense. In the modern world, telecommunications have replaced direct contact as the main link between buyers and sellers.

The market facilitates trade and enables the distribution and allocation of resources in a society. Markets allow any tradable item to be evaluated and priced. They reallocate commodities from suppliers to demanders.

The two sides of each market transaction are called supply and demand. Supply is the quantity of goods or services sellers will offer for sale at different prices at a particular time and place. Demand is the total amount of a type of goods or services that people or companies buy at a particular time and place.

Supply and demand are the twin factors which determine the price in any market. The market mechanism moves price toward the equilibrium price level:

1. If the market price is above the equilibrium price, surpluses appear. To get rid of the surplus, sellers lower prices and production rates. Buyers purchase more at lower prices.

2. If the market price is below equilibrium price, shortages occur. Buyers bid up the price of the commodity and sellers raise production rates in response to the increased price.

In both cases price and production rates change until the market reaches the equilibrium price and equilibrium production rate. This is the price and production rate that clears the market efficiency.

The market mechanism may fail if there are externalities, and it may not allocate income in a desirable way, but it does tell us what to produce, how to produce, and for whom to produce.