Markets

 

Supermarket-Portland, Oregon

Learning Objectives

  • Markets:  Definition and Purpose

 

 

Markets are institutions where buyers and sellers come together to exchange goods and services; there are many types of markets, physical like a supermarket, virtual like Ebay, local and international and more.  Markets have two sides:  the buyers/consumers who represent the Demand side of the market, and sellers/producers who represent the Supply side of the market.  The two sides share information through markets to help them make critical decisions and meet their needs:  the buyers gather information about products availability, features and prices while sellers figure out what consumers desire and prefer.  Overall, markets play a crucial role in our economy as they provide a tool to allocate our scarce resources,  and answer the following critical questions:

  • Which goods and services do we choose to produce since we do not have enough resources to produce all that we would want?  What is more important?  See the graph below for an idea of how, on average, consumers spend their income:
  • The goods and services that consumers want and that will generate a profit for sellers. Markets through supply and demand will help us determine those goods and services that have a high enough demand by consumers and low enough cost for sellers that the resulting market price will bring profit to sellers.
  • If a product cost $20 to produce but consumers are only willing to pay $10 for it, that product will not be produced.
  • How do we produce those goods and services; which resources do we use?  How much?  Less labor?  More capital?
  • Minimizing cost of production in order to maximize profit is a guiding principle for sellers and helps the economy overall use our scarce resources to their maximum potential.  Competition is an essential feature of markets that provide incentives to firms to lower cost and ensure our resources are used efficiently.
  • How do we distribute those goods and services?  Who gets them?

Car Auction-S. Haci-2015
  • Consumers (the demand) determine whether they are willing and able to pay for the goods and services produced based on personal preferences and income level.  In some cases, governments decide on the distribution of goods and services such as public education and social services, but the allocation through markets is based on preferences and ability to pay.

The interaction of buyers and sellers through markets helps us organize the economy efficiently and achieve some social welfare.  Next, the model of Supply and Demand describes consumers and sellers behavior based on price which is a crucial element in the decision process for both groups.