The Nature Of Markets
Markets are essential features of a market economy. A market, by definition, is a collection of institutions, processes, systems or infrastructures through which various parties engage in transaction. Most markets, however, depend on sellers providing their commodities or services for sale to buyers at exchange for payment, while other markets, such as commodity markets, rely mainly on buyers purchasing goods or services from sellers in return for cash.
Markets function in various economic systems by allowing sellers and buyers to set a maximum price above which they will not sell or buy. This enables them to receive a full market price for the good or service, although they still have to consider the risk that they might pay more than this to someone else who will offer a better deal. Some markets have complex underlying structures to support this basic principle of supply and demand, with prices often reflecting aspects of supply and demand such as unemployment rates, economic growth and inflation, and other fundamental economic factors. Markets may also be designed to address specific needs, for example, to ensure the supply of important resources or to ensure payments are made to a particular group or class.
Markets often have a central location, which has a significant effect on the way they operate. In some cases centralised economies have smoother process and greater efficiency than decentralised economies. Centralised markets also have long-standing traditions of intellectual property protection and competitive licensing. While there are exceptions to these common characteristics, these are the general characteristics of all markets. Centralised economies tend to have a higher degree of economic freedom, lower levels of taxation and higher levels of regulation than decentralised economies.
Markets operate in a flexible fashion. There is a fundamental difference between markets and relationships, as illustrated by the fact that a horse and carriage cannot be traded between themselves, while a sofa and table can be traded between sofa owners. In a market the goods available are always known to the parties to the transaction, and the relevant information is communicated to all involved in the transaction. A relationship on the other hand, does not provide any information to the seller or buyer, and there is never any intermediary in the transaction. The sale of a product between unrelated buyers and sellers is called a marketplace.
Markets are characterized by fluidity and competition. A market with little or no competition tends to be characterized by prices that are set to meet the needs of all buyers and sellers and there is no pressure or incentive for either the buyers or sellers to take advantage of other buyers or sellers. The existence of a number of buyers and sellers makes the price of the goods that are traded possible to vary with changes in demand, supply and margin requirements.
Markets allow for competition because sellers try to reduce the price of their products to be competitive with those of their competitors. It is only when the situation gets out of hand that sellers and buyers band together to force a change in the existing conditions of the market. Usually the prices of goods increase to satisfy the demands of buyers resulting in a rise in prices of commodities. Markets thus allow for competition, where prices are set based on demand and supply forces.