Any platform- physical or virtual that facilitates the exchange of commodities.
The market is defined as any platform- physical or virtual that facilitates the exchange of commodities. These commodities may be goods, services, resources, information, currency, or any other desired resource.
It is a system of institutions, culture, social relations, political economy, and physical infrastructure of an economy where economic transactions occur. There must be at least two parties involved in a transaction.
The key players are buyers and sellers, i.e., those who want the resources and those who have them. There may be more than one buyer or seller in an exchange.
It is considered the total of all buyers and sellers in an area.
The area may be a local region, community, country, or the world. All economic agents in the area are connected through modern modes of transportation or communication to facilitate exchange.
These exchanges or trades happen to satisfy individuals or organizations.
Each of these individual economic agents operates under the forces of demand and supply.
The buyers contribute to the demand for a commodity, whereas the seller makes up the supply.
This interaction between supply and demand determines the price of the commodity. It is important to understand that the legal tender or money may or may not be necessary to facilitate trade in a transaction.
The definition varies according to the context. In general, it is a place for exchange. However, the term can also be used to describe a group of buyers seeking a particular commodity.
For example, the housing market is used to define the structure of residential real estate. On the other hand, the labor market refers to the availability and demand of labor and determines wage rates.
It may also refer to a particular seller side like the Middle Eastern Oil market.
In a narrower sense, it can be described as a place that could be physical (like retail outlets or stores) or virtual (like Amazon) facilitating exchange.
The most inclusive definition was given by the French economist Antoine Augustin Cournot.
Economists understand the term as not any particular place in which things are bought and sold but the whole of any region in which buyers and sellers are in such free intercourse with one another that the prices of the same goods tend to equalize easily and quickly.
The common characteristics of all types of such systems are
- The existence of buyers and sellers - The number of buyers and sellers may vary according to the structure. For example, a monopoly is a structure characterized by the existence of a single seller. In contrast, a perfectly competitive structure involves a large number of sellers.
- The interplay of supply-side and demand-side economics - Both supply and demand factors exists in all transactions. This interaction determines the price that prevails in the economy.
Based on the kind of goods sold, the volume of trade, regulations, and other such factors, they can be classified into numerous types.
The most common types of markets are
They only deal in the trading of financial instruments. These instruments may include stocks, securities, currency, bonds, and other financial assets.
They are used as a means of raising finance.
For short-term finance, transactions occur in the money market, whereas capital markets are used for long-term finance.
They can be physical places like the London Stock Exchange(LSE), New York Stock Exchange (NYSE), or an electronic platform like NASDAQ.
Based on the instrument traded, they can further be classified into
- Foreign exchange
- Interbank lending
They refer to the exchange system for a specific type of good. In traditional systems, the price is set according to the demand and supply of the good. However, the most eager buyer determines the price in auction structures.
There exists one seller and multiple buyers, and the buyers bid against each other to set the purchase price of the good. The goods are then sold to the highest bidding customer.
This kind of system is common for rare commodities, luxuries like antiques and artworks, and jewelry. It is also prevalent in real estate, where the owner or seller tries to get maximum value for his property.
3. Black or Shadow
They refer to illegal, unregulated places where goods are sold at inflated prices. These systems attract criminal activity and financial liability.
Most transactions in the black market structure are done through cash to avoid tax liability. Unfortunately, this also makes it harder for the government to trace the existence of such structures.
Shortage of certain goods creates an opportunity for the sellers to charge above-normal prices for their goods. This allows the sellers to create a shadow structure to dictate the price of the goods.
- The shortage of alcohol in the Prohibition Era created an opportunity for the alcohol bootleggers to charge more than the markup price.
- The trading systems for illegally acquired goods, poached animals, and ticket scalping.
4. Intermediate Goods
Any commodity that is not required for final consumption but the production of other goods is called an intermediate good.
These structures correspond to the sale of raw materials and other intermediate goods among producers. The majority of trade in these systems are B2B transactions (business-to-business). It is primarily used for capital goods.
Examples include selling heavy machinery and aircraft or defense equipment among organizations.
It refers to a place for the exchange of information and knowledge-based resources. The simplest form of this structure is seen on online platforms where people seeking knowledge or answers pay compensation to experts providing solutions.
For example, internet-based knowledge exchange sites like Mahalo.com are based on a fee-based expert exchange structure.
Types of market structures
Structures describe how firms are categorized based on their power and the extent to which they are affected by external factors.
Based on the degree and nature of competition faced, some of the most common structures are
1. Monopoly - It refers to the existence of a single seller (firm, organization, or individual)and multiple buyers.
The overall control over the price demanded or quantity supplied is with the seller. A pure monopoly implies the full unregulated power of the seller.
Examples of real-world monopolies are Google (for search engines) and Microsoft (for personal computers).
2. Oligopoly- Under this structure, there exist few sellers (more than one but few) and multiple buyers. No single seller has complete power. However, each seller's decision has a significant impact on others.
A primary example of an oligopoly is the commercial airline sector, where few sellers exist for multiple consumers. As a result, a price decline by a single airline decreases the proportionate share for all others.
3. Perfect Competition- It is an absolute structure with multiple buyers and sellers. The economic power is not concentrated within any individual unit. The buyers are assumed to have perfect information and no transaction costs.
There is no perfectly competitive system in the real world. However, a freely working foreign exchange system is near competitive.
4. Monopolistic Competition - Under this structure, multiple firms in the same industry sell somewhat differentiated products.
The products may be substitutes or differentiated in terms of brand. The decisions made by any firm may not influence the decisions of other firms in the industry.
For example, the hotel industry is largely differentiated in terms of size and quality of services. Therefore, the decisions made by firms in the industry for luxury hotels do not affect the affordable hotel chains.
4. Monopsonist- Under this structure, only a single buyer (maybe a firm, an organization, or an individual). The buyer or the monopsonist has control of the economic power.
For example, a firm setting up a factory where labor can only be recruited from the nearby town. In this case, the labor force acts as a monopsonist since they have sole control of the labor supply.
5. Oligopsony- It refers to the structure where a few buyers dictate the market's conditions and influence the sellers' decisions.
The buyers are few but huge in terms of volume of trade. Buyers being the key players, can keep costs down and have generous control over sellers.
For example, the supermarket industry has major but few chains with a worldwide reach (like Walmart). On the other hand, the sellers or vendors of these chains are many.
6. Natural Monopoly- It is a monopoly that may naturally occur because of the enormous start-up costs involved.
These sunk costs act as barriers to the entry and exit of firms. Thus, a single supplier ends up being the only supplier of a good or industry in a particular geographical area.
For example, the supply of electricity by a single distributor across a town or a country.
Most economies are required to operate under a legal system. This implies that apart from demand and supply forces, rules and regulations set by the governing body also play an important role in the working of an economy.
The local authorities may form the rules and regulations, national government, or international trade agreements.
The purpose of regulatory bodies is
- To make policies and guidelines for the smooth functioning of the economy.
- To avoid malpractices.
- To establish the level of criminal and civil liabilities in case of malpractices.
- To reduce the effects of asymmetric information to prevent moral hazards and adverse selection.
- To solve externalities and to avoid efficiency failure.
- To ensure the provision of public goods for welfare.
- To protect the rights and safety of citizens by maintaining specific quality standards for products.
Regulations are also placed on monopolists to monitor their power in an economy. This prevents the misuse of power by the producer.
Government monopolies are sometimes necessary to avoid monopolies by private individuals in sectors like defense and war equipment. This ensures balanced power in sectors of public welfare.
The Securities and Exchange Commission (SEC) regulates the stock exchange in the US by overseeing the exchange of securities and firms listed on the stock exchange.
It is a consolidated term to describe the group of all buyers interested in the product, having the means to buy it, and allowed by law to acquire it. Here, it only refers to the buyers of a specific good.
They are essential to bringing willing buyers and sellers to a common platform. This enables trade and distribution of resources across consumers. It can also provide a medium for consumers to exchange among themselves to maximize gains from trade.
Primary structures are the financial systems where new stocks and bonds are created and sold by companies for the first time. This can be through Initial Public Offerings(IPO). Securities are bought directly from the sellers.
Secondary structures are financial systems where securities created in the primary structures get resold and traded by investors. This can include an exchange between buyers.
It refers to all systems where factors of production are sold. These include all factors a firm needs to purchase, rent, or hire to produce goods and services. It involves the labor, capital, and land.
By promoting competition among sellers, a free system ensures increased efficiency, production, and innovation.
Open trade policies, mobility of capital, increased level of economic activities, and investment opportunities contribute to the balanced economic growth of a country. By allowing a certain degree of competition, the price of commodities can be kept low to ensure equity and fairness to consumers.
It refers to the selling of consumer goods for their final use. Consumer goods include goods that are available directly for use as clothing and food.
The buyers in the consumer systems are buying the goods for their personal use and not for resale or creating goods further.
It is a system of buying and selling goods and services outside the home country. Commodities leave the national borders and become part of the world structure.
This system's majority of transactions are international trade and foreign investments.
These systems are governed by international trade agreements and foreign policies of both countries involved.
Examples include investing in foreign companies and buying foreign exchange.
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Researched and authored by Manya Bhardwaj | LinkedIn
Reviewed and Edited by Parul Gupta | LinkedIn
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