In common parlance, the term ‘market‘ means a particular place or locality, where goods are bought and sold. We often speak of the Mumbai market, the New York market, the Rani Bagh market and so on. In Economics, however, this term is used in a broader sense.
It refers to a complex set of activities by which actual and potential buyers as well as sellers with each other and the price as well as the output are determined. In the process of determining the terms at which the exchange would take place, they may make all sorts of bids and offers, using bargaining and haggling.
The term ‘potential’ here implies that if the prevailing price of the commodity happens to be higher or lower than the one at which same transactors plan to deal, those buyers or sellers in the two cases respectively are eliminated from the market.
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Thus, the market determines who the buyers and sellers are, what the price will be and what quantities will be bought and sold. Market is actually the essence of business. All business decisions relating to price, output, product style, advertisement, investment, etc., are taken in the light of actual as well as potential competition by new entrants.
It is important to note that a market is established irrespective of time and place, whenever two groups of transactors (buyers and sellers) are there to undertake exchange transactions. The buyers and sellers (called market players) may be spread over a whole city, a region, a country or even the entire world.
The physical presence of buyers and sellers is not relevant in the economist’s conception of market. The transactor’s fixers, telegrams, telephones or some other modern modes of communication. Modern modes of communication make information gathering, storing and processing easier.
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A French economist Cournot has defined market as “not any particular market 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 price of the same goods tends to equality easily and quickly”.
In Economics, the term ‘market’ is used in reference to a commodity, such as cloth market (at Chandni Chowk), furniture market (at Kirti Nagar), marble market (at Raja Garden), timber market (at Pahar Ganj), grain market (at Khari Baoli), paper market (at Chawri Bazar), etc. or a market for some factor of production.
The ‘market’ here may be limited to a small city as for bread, or it may be country wide as for cement or it may be world wide as for foreign exchange, gold and diamond. There can be wholesale market (for large scale deal) or retail market (for small scale deal).
One can also think of capital market, wherein banking and non-banking financial services are provided. Or, there may be stock market, bond market, real estate market, resale market, human limbs market, matrimonial market and so on. In a spot market, deals are immediate, while in a forward market, the reference is to future transactions.
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Actually, there is no end to the list of markets. The markets for the various commodities have now become far more extensive than what they used to be in the past on account of extensive transport and communication system. For example, earlier fruits and vegetables had only local markets.
But, now these are traded in national and international markets. Favourable institutional changes affecting tariffs and other trading arrangements are also responsible for extensive transactions on the part of buyers and sellers, affecting the size of the market for the commodity by opening up the possibility of trade. In the words of Jevons, “The word market has been generalised so as to mean any body of persons who are in intimate business relations and carry on extensive transactions in any commodity”.
Markets exist in every economy, so long as two or more individuals are willing to undertake exchange transactions. Further, an economy, particularly the capitalist economy cannot function without markets. Truly speaking, the whole rationality of the capitalist economy is deeply rooted in the price or market mechanism.
The consumers exercise their free choice in the market and the producers take decisions about the allocation of resources including time among competing ends in response to market demand. Decision making by the producers will become irrational, erroneous and inefficient in the absence of markets.
Markets provide information required for making optimal policy decisions. This information may pertain to the nature of goods traded, the prices prevailing and who the transactors are.
In today’s business world, there has been a shift from ‘mass production’ to ‘customised production’ in the market, where tailor made goods are produced. The customer has become demanding and quality conscious. Customer’s care and satisfaction lies at the root of the business.
Customers are even statutorily protected through various enactments like Consumer Protection Act, Monopolies and Restrictive Trade Practices Act, etc. Today, customers may not walk to banks. Rather, banks walk to the doors of customers with the evolution of home banking concept.
Customers do not walk to the market place, market walks into their drawing rooms Asian Sky Shop is an example. Such direct marketing devices further develop the monophony power of the buyers. Market is no longer determined by all that is supplied by producer.
It will be subject to market clearance. Thus, we have moved a long way from classical economist J.B. Say’s, law of market ‘supply creates its own demand’. Now, buyers’ market has replaced the traditional sellers’ market.
Growths of markets lead to profitability creating opportunities for further investment and diversification into new areas. Further, on account of external economies, one market supports the other market. Thus, market is a determinant of micro level business growth as well as macro level of national economic growth. Each firm has to design different market strategies to take care of market opportunities along with threats or risks.