What is a Market and its Role?

Date: 2015-10-07; view: 662.

Defining the term market is a problem because the term is used in so many different ways. Often we think of markets as people, alone or in organizations - teen-agers, factory purchasing agents, department store fashion buyers. There are products markets - for peanuts, ten-speed bikes, machine tools. Markets are often thought of as places of exchange - shopping centers or more temporary places, like weekend “flea markets”, or trade shows, such as furniture markets for manufacturers and distributors. Geography can describe markets - the Asian market, the Boston market.

Marketing has been considered as a human exchange process to satisfy needs and wants. With this in mind, we can think of a market as people or organizations that have wants and needs and that have the ability and willingness to exchange something of value for them. The most basic scheme classifies markets into two broad types: the consumer market and the industrial market. Consumers alone or as part of a family or household, buy products and services for their own use. The industrial market buys products and services primarily to use in running business, or to resell, or to produce further goods and services.

Markets bring together buyers and sellers of goods and services. In some cases, such as a local fruit stall, buyers and sellers meet physically. In other cases, such as the stock market, business can be transacted over the telephone, almost by remote control. We need not go into these details. Instead, we use a general definition of markets.

A market is a shorthand expression for the process by which households' decisions about consumption of alternative goods, firms' decisions about what and how to produce, and workers' decisions about how much and for whom to work are all reconciled by adjustment of prices.

Prices of goods and resources, such as labour, machinery and land, adjust to ensure that scarce resources are used to produce those goods and services that society demands.

Much of economics is devoted to the study of how markets and prices enable society to solve the problem of what, how and for whom to produce. Suppose you buy a hamburger for your lunch. What does this have to do with markets and prices? You chose the cafe because it was fast, convenient and cheap. Given your desire to eat, and your limited resources, the low hamburger price told you that this was a good way to satisfy your appetite. You probably prefer steak but that is more expensive. The price of steak is high enough to ensure that society answers the ‘for whom' question about lunchtime steaks in favour of someone else.

Now think about the seller's viewpoint. The cafe owner is in the business because, given the price of hamburger meat, the rent and the wages that must be paid, it is still possible to sell hamburgers at a profit. If rents were higher, it might be more profitable to sell hamburgers in cheaper area or to switch to luxury lunches for rich executives on expense accounts. The student behind the counter is working there because it is a suitable part-time job which pays a bit of money. If the wage were a bit lower it would hardly be worth working at all. Conversely, the job is unskilled and there are plenty of students looking for such work, so owners of cafes do not have to offer very high wages.

Prices are guiding your decision to buy a hamburger, the owner's decision to sell hamburgers, and the student's decision to take the job. Society is allocating resources - meat, buildings and labour - into hamburger production through the price system. If nobody liked hamburgers, the owner could not sell enough at a price that covered the cost of running the cafe and society would devote no resources for hamburger production. People's desire to eat hamburgers guides resources into hamburger production. However, if cattle contracted a disease, thereby reducing the economy's ability to produce meat products, competition to purchase more scarce supplies of beef, hamburger produces would be forced to raise prices, and consumers would buy more cheese sandwiches for lunch. Adjustments in prices would encourage society to reallocate resources to reflect the increased scarcity of cattle.

There were several markets involved in your purchase of a hamburger. You and the cafe owner were part of the market for lunches. The student behind the counter was part of the local labour market. The cafe owner was part of the local wholesale meat market and the local market for rented buildings. These descriptions of markets are not very precise. Were you part of the market for lunches, the market for prepared food, or the market for sandwiches to which you would have to turned if hamburgers had been more expensive? That is why we have adopted a very general definition of markets which emphasizes that they are arrangements through which prices influence the allocation of scarce resources.

1. What example is given of a market where sellers and buyers actually meet?

2. How are households' decisions on what to buy are reconciled?

3. Why do prices adjust?

4. What problems do markets and prices solve for society?

5. Why is the cafe owner in business?

6. Why do cafe owners not have to pay high wages?

7. What makes society put resources into hamburger production?

8. What would consumers do if hamburger prices rose?

9. How many markets does the writer say you are involved in if you buy a hamburger?

10. Does the writer give an exact description of a market?