What is a Market and Its Role?

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 – teenagers, 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 exchan-

ge – 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 de-

tails. Instead, we use a general definition of markets.

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A market is a shorthand expression for the process by which house-

holds’ decisions about consumption of alternative goods, firms’ deci-

sions 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 pric-

es 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 expen-

sive. 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 busi-

ness 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 ac-

counts. The student behind the counter is working there because it is a

suitable part-time job which pays a bit of money. If the wages were a bit

lower it would hardly be worth working at all. Conversely, the job is un-

skilled 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 ham-

burger production through the price system. If nobody liked hamburg-

ers, 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 were contracted by a disease,

thereby reducing the economy’s ability to produce meat products, com-

petition to purchase more scarce supplies of beef, hamburger producers

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 parts of the market for lunches. The student

behind the counter was parts of the local labour market. The cafe owner

was part of the local wholesale meat market and the local market for ren-

ted 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 turn 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 actu-

ally 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?

Text 2

Read the text and be ready to speak about market leaders, challengers and followers.

Give your own examples of each.