What are markets?

Defining the term ‘market’ and exploring its functions

Formally defined, a market is ‘a place where two parties can gather to facilitate the exchange of goods and services.’ [1] These parties are generally the producer and consumer and can occur anywhere either physically, like a supermarket, or virtually, like on a clothing website. Markets are built on the foundation of trade, where items of relatively equal value to the parties involved are exchanged because of each value the received item more than what they traded – for example, if you buy strawberries for £2 from a stall owner, you valued the strawberries more than the £2 and vice versa for the stall owner.

There are many different types of markets, including labour, securities, housing and stock just to name a few. All of these markets trade using different ‘currencies’ – in a labour market, the currency is work, where the employee offers a certain skill set that is required, and the employer provides the employee with a job to use this skill set for their own or their company’s benefit. Another popular example is the stock market, in which portions of a company are made available for sale, with those who buy them becoming shareholders. These shareholders then profit if the company’s stock value increases and the company benefits from the funding received when the shares were bought. In this case, the currency would be shares.

Markets rely on supply and demand: consumers create demand by being willing and able to buy the good at a certain price – if the price is too low, then excess demand occurs and the price is bid up by consumers to ration demand. On the other hand, manufacturers create supply by being willing and able to sell it at a certain price, and if the price is too high, producers will end up making too many units and excess supply forms, and so the price falls to increase the demand and sell off the surplus. These processes fluctuate until a balance is achieved, or a market equilibrium, where supply is equal to demand. This means that producers are making as much product and consumers want to buy, and so consumers benefit from a fair price as there is no shortage and producers benefit from fair costs as there is no surplus or waste.

Unfortunately, this is only theoretical, and sometimes the market cannot truly reach a balance, as there are too many factors influencing the supply and demand. A food market can be used to exemplify this –  in winter, the supply of strawberries falls as they do not grow well in cold conditions, but the demand remains constant as people still want to eat strawberries. This results in a shortage, where supply is below demand, and producers can take advantage of this by raising the price, as more people want the same product and so consumers are more likely to pay a higher price for the strawberries. However, higher prices could deter potential buyers, resulting in a fall in demand. Producers then have less incentive to grow strawberries and supply falls again. This leads to a spiral of decline as prices rise and demand falls until supply is finally able to meet demand and highlights how markets may not be able to reach a true equilibrium.

There are three classes of market structures: free, planned and a combination of the two in the form of a mixed economy, and I will go on to explore these three types in detail over the next few posts.

[1] https://www.investopedia.com/terms/m/market.asp


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