In economics, a market is any structure that allows buyers and sellers to exchange goods, services and information. The exchange of goods or services, either with money or without it, is a transaction."Transaction", Oxford Dictionaries. Retrieved 25 October 2014. In free market economies, they are the process by which prices and allocations of goods and services are established. Markets facilitate trade and enable the distribution and allocation of resources in a society by allowing tradeable items to be evaluated and priced. A market emerges more or less spontaneously or may be constructed deliberately through human interaction in order to enable the exchange of rights (cf. ownership) of services and goods. Markets generally supplant gift economies and are often held in place through rules and customs, such as a booth fee, competitive pricing, and source of goods for sale (local produce or stock registration).
Markets can differ by products (goods, services) or factors (labour and capital) sold, product differentiation, place in which exchanges are carried, buyers targeted, duration, selling process, government regulation, taxes, subsidies, minimum wages, price ceilings, legality of exchange, liquidity, intensity of speculation, size, concentration, exchange asymmetry, relative prices, volatility and geographic extension. The geographic boundaries of a market may vary considerably, for example the food market in a single building, the real estate market in a local city, the consumer market in an entire country, or the economy of an international trade bloc where the same rules apply throughout. Markets can also be worldwide, see for example the global diamond trade. National economies can also be classified as developed markets or developing markets.
Market participants or economic agents consist of all the buyers and sellers of a good who influence its price, which is a major topic of study of economics and has given rise to several theories and models concerning the basic market forces of supply and demand. Microeconomics traditionally focuses on the study of market structure and the efficiency of market equilibrium; when the latter (if it exists) is not efficient, then economists say that a market failure has occurred. However, it is not always clear how the allocation of resources can be improved since there is always the possibility of government failure.
Definition In economics, a market is a coordinating mechanism that uses prices to convey information among economic entities (such as firms, households and individuals) to regulate production and distribution. In his seminal 1937 article "The Nature of the Firm", Ronald Coase wrote: "An economist thinks of the economic system as being coordinated by the price mechanism....in economic theory, we find that the allocation of factors of production between different uses is determined by the price mechanism". Thus the usage of the price mechanism to convey information is the defining feature of the market. This is in contrast to a firm, which as Coase put it, "the distinguishing mark of the firm is the super-session of the price mechanism".
Thus, Firms and Markets are two opposite forms of organizing production; Coase wrote:
There are also other hybrid forms of coordinating mechanisms, in between the hierarchical firm and price-coordinating market(e.g. global value chains, Business Ventures, Joint Venture, and strategic alliances).
The reasons for the existence of firms or other forms of co-ordinating mechanisms of production and distribution alongside the market are studied in "The Theory of the Firm" literature, with various complete and incomplete contract theories trying to explain the existence of the firm. Incomplete contract theories that are explicitly based on bounded rationality lead to the costs of writing complete contracts. Such theories include: Transaction Cost Economies by Oliver Williamson and Residual Rights Theory by Groomsman, Hart, and Moore.
The market/firm distinction can be contrasted with the relationship between the agents transacting. While in a market, the relationship is short term and restricted to the contract. In the case of firms and other co-ordinating mechanisms, it is for a longer duration.
In the modern world, much economic activity takes place through fiat and not the market. Lafontaine and Slade (2007) estimates, in the US, that the total value added in transactions inside the firms equal the total value added of all market transactions. Similarly, 80% of all World Trade is conducted under Global Value Chains (2012 estimate), while 33% (1996 estimate) is intra-firm trade. Nearly 50% of US imports and 30% of exports take place within firms. While Rajan and Zingales (1998) have found that in 43 countries two-thirds of the growth in value added between 1980 and 1990 came from increase in firm size.
Types A market is one of the many varieties of systems, institutions, procedures, social relations and infrastructures whereby parties engage in exchange. While parties may exchange goods and services by barter, most markets rely on sellers offering their goods or services (including labour) in exchange for money from buyers. It can be said that a market is the process by which the prices of goods and services are established. Markets facilitate trade and enable the distribution and allocation of resources in a society. Markets allow any trade-able item to be evaluated and priced. A market sometimes emerges more or less spontaneously or may be constructed deliberately by human interaction in order to enable the exchange of rights (cf. ownership) of services and goods.
Markets of varying types can spontaneously arise whenever a party has interest in a good or service that some other party can provide. Hence there can be a market for cigarettes in correctional facilities, another for chewing gum in a playground, and yet another for contracts for the future delivery of a commodity. There can be black markets, where a good is exchanged illegally, for example markets for goods under a command economy despite pressure to repress them and virtual markets, such as eBay, in which buyers and sellers do not physically interact during negotiation. A market can be organized as an auction, as a private electronic market, as a commodity wholesale market, as a shopping center, as complex institutions such as international markets and as an informal discussion between two individuals.
Markets vary in form, scale (volume and geographic reach), location and types of participants as well as the types of goods and services traded. The following is a non exhaustive list:
Physical consumer markets
Food retail markets: farmers' markets, fish markets, wet markets and grocery stores Retail marketplaces: public markets, market squares, Main Streets, High Streets, bazaars, souqs, night markets, shopping strip malls and shopping malls Big-box stores: supermarkets, hypermarkets and discount stores Ad hoc auction markets: process of buying and selling goods or services by offering them up for bid, taking bids and then selling the item to the highest bidder Used goods markets such as flea markets Temporary markets such as fairs Real estate markets
Physical business markets
Physical wholesale markets: sale of goods or merchandise to retailers; to industrial, commercial, institutional, or other professional business users or to other wholesalers and related subordinated services Markets for intermediate goods used in production of other goods and services Labour markets: where people sell their labour to businesses in exchange for a wage Online auctions and Ad hoc auction markets: process of buying and selling goods or services by offering them up for bid, taking bids and then selling the item to the highest bidder Temporary business markets such as trade fairs Energy markets
Non-physical markets Media markets (broadcast market): is a region where the population can receive the same (or similar) television and radio station offerings and may also include other types of media including newspapers and Internet content Internet markets (electronic commerce): trading in products or services using computer networks, such as the Internet Artificial markets created by regulation to exchange rights for derivatives that have been designed to ameliorate externalities, such as pollution permits (see carbon trading)
Financial markets
Financial markets facilitate the exchange of liquid assets. Most investors prefer investing in two markets: The stock markets, for the exchange of shares in corporations (NYSE, AMEX and the NASDAQ are the most common stock markets in the United States) The bond markets
There are also: Currency markets are used to trade one currency for another, and are often used for speculation on currency exchange rates The money market is the name for the global market for lending and borrowing Futures markets, where contracts are exchanged regarding the future delivery of goods Insurance markets Debt markets
Unauthorized and illegal markets Grey markets (parallel markets): is the trade of a commodity through distribution channels which, while legal, are unofficial, unauthorized, or unintended by the original manufacturer markets in illegal goods such as the market for illicit drugs, illegal arms, infringing products, cigarettes sold to minors or untaxed cigarettes (in some jurisdictions), or the private sale of unpasteurized goat milk
Mechanisms
In economics, a market that runs under laissez-faire policies is called a free market: it is "free" from the government, in the sense that the government makes no attempt to intervene through taxes, subsidies, minimum wages, price ceilings and so on. However, market prices may be distorted by a seller or sellers with monopoly power, or a buyer with monopsony power. Such price distortions can have an adverse effect on market participant's welfare and reduce the efficiency of market outcomes. The relative level of organization and negotiating power of buyers and sellers also markedly affects the functioning of the market.
Markets are a system and systems have structure. The structure of a well-functioning market is defined by the theory of perfect competition. Well-functioning markets of the real world are never perfect, but basic structural characteristics can be approximated for real world markets, for example: Many small buyers and sellers Buyers and sellers have equal access to information Products are comparable
Markets where price negotiations meet equilibrium, but the equilibrium is not efficient are said to experience market failure. Market failures are often associated with time-inconsistent preferences, information asymmetries, non-perfectly competitive markets, principal–agent problems, externalities, or public goods. Among the major negative externalities which can occur as a side effect of production and market exchange, are air pollution (side-effect of manufacturing and logistics) and environmental degradation (side-effect of farming and urbanization).