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DEMAND DETERMINANTS: Five basic ceteris paribus factors that affect demand, but which are assumed constant when a demand curve is constructed. Changes in any one causes a shift of the demand curve. The five demand determinants are: income, preferences, other prices, buyers' expectations, and number of buyers.

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MARKET:

The organized exchange of commodities (goods, services, or resources) between buyers and sellers within a specific geographic area and during a given period of time. Markets are the exchange between buyers who want a good (the demand-side of the market) and the sellers who have it (the supply-side of the market).
A market is the mechanism used to exchange commodities and to address the scarcity problem. It is the primary method used to allocate resources in modern economies. As such, it is also a cornerstone of the study of economics.

Addressing Scarcity

Markets were devised by human beings in the never-ending quest to address the fundamental scarcity problem (unlimited wants and needs, but limited resources).
  • Unlimited wants and needs provide the foundation of market demand. Buyers want and need goods that provide satisfaction and are willing to give up something of value in exchange, which is usually (but not necessarily) a money payment.

  • Limited resources provide the foundation of market supply. Sellers are willing to part with goods produced using their limited resources in return for the valuable payment, which can then be used to acquire other goods that satisfy their wants and needs.

What is Traded

Markets are used to exchange a wide range of commodities, including goods, services, and resources.
  • Goods are physical, tangible items or products that are used to satisfy wants and needs.

  • Services are intangible activities that provide direct satisfaction of wants and needs without the production of tangible products or goods.

  • Resources are inputs in the production process (labor, capital, land, and entrepreneurship) that are used in the production of goods and services.

While, in principle, almost any commodity of value can be exchanged through markets, a few important exceptions exist. These exceptions can be seen through two primary characteristics.

  • Non-Payer Excludability: This is the ease of excluding non-payers from gaining access to a commodity.

  • Consumption Rivalry: This is the degree to which consumption or use of a commodity by one person prevents consumption by another.
These two characteristics generate four alternative types of commodities.
  • Private goods are characterized by the ease of excluding non-payers and by rival consumption, making market exchanges relatively straightforward. Buyers get the good only if they pay the price.

  • Public goods are characterized by the difficulty of excluding non-payers and by non-rival consumption, which makes market exchanges virtually impossible.

  • Common-property goods are characterized by the difficulty of excluding non-payers and by rival consumption, meaning they cannot be exchanged through markets, but they should be.

  • Near-public goods are characterized by the ease of excluding non-payers and by non-rival consumption, which makes market exchanges possible but unnecessary.

Efficiency problems inevitably result if markets are not used to exchange private goods, or if they are used to exchange public, near-public, and common-property goods.

The Price of Exchange

Most market exchanges in modern economies involve a commodity on one side and a monetary payment on the other. In essence, a buyer gives up money and receives a good, while a seller gives up a good and receives money. For example, when Duncan Thurly buys a Hot Momma Fudge Bananarama Ice Cream Sundae for $2, he acquires the sundae and gives up $2. The Hot Momma Fudge Bananarama Ice Cream Shoppe receives $2 and gives up the sundae.

The monetary payment side of the exchange is generally termed the price. For example, the price of the Hot Momma Fudge Bananarama Ice Cream Sundae in the previous example is $2.

While most markets involve the exchange of money for a commodity, a monetary payment is not essential to the process. That is, one commodity can be traded for another, doing what is commonly termed barter. Duncan Thurly, for example, could conceivably "buy" a Hot Momma Fudge Bananarama Ice Cream Sundae by giving up something like an autographed photograph of Brace Brickhead, Medical Detective. No money is needed.

A Voluntary Process

Market exchanges are a voluntary means of allocating resources. Buyers and sellers enter into the exchange without coercion, that is, without government laws, rules, regulations, or mandates. Buyers and sellers buy or sell if they choose to. The decision is theirs. Buyers buy want they want (if the price is satisfactory). Sellers sell what they want (if the price is satisfactory).

The Market Model

The Market Model
Markets are prevalent in modern economies. Some are formal and highly organized, like the stock market (especially the New York Stock Exchange); others are informal and much less organized, like weekend flea markets or rummage sales; and most fall somewhere in the middle, like shopping at the super market. Economists make sense of this diverse, hodge-podge of real world markets using an abstract market model.

A representative abstract market model is illustrated in this exhibit. Like any abstraction, this model seeks to capture the relevant information (demand, supply, price, quantity) while ignoring (hopefully) unimportant details.

In this diagram, the demand side of the market is represented by the negatively-sloped demand curve, labeled D. The supply side of the market is represented by the positively-sloped supply curve, labeled S. The intersection of the two curves represents the equilibrium price and quantity, the price at which buyers and sellers are willing and able to exchange the same quantity.

An key use of the market model is comparative statics, an analysis of how equilibrium price and quantity are affected if the market is disrupted by a change in one or more demand or supply determinant. Comparative statics can answer such questions as "How would the price of Hot Momma Fudge Bananarama Ice Cream Sundae change if buyers had more income?"

An Efficient Process

Markets are much beloved among pointy-headed economists (especially those who live and work in capitalistic economies), because they can efficiently allocate resources with little or no government intervention. To do so, however, markets must be competitive and otherwise free of market failures.

Markets are efficient if satisfaction cannot be increased by exchanging more or less of the commodity. This results because the satisfaction (or value) obtained from the last unit of the commodity produced and exchanged is equal to the satisfaction (or value) foregone by not producing other commodities, that is opportunity cost. In a competitive market free of market failures, this is achieved in equilibrium with equality between the demand price and the supply price.

Market Failures

Markets are not efficient if they are afflicted by market failures. The four most important market failures are: (1) public goods, (2) market control, (3) externalities, and (4) imperfection information. Each of these prevent the equality between the value of the commodity exchanged and the value of other commodities foregone.

Public goods, as noted earlier, are commodities characterized by problems with excluding non-payers and by non-rival consumption. Market control emerges if one side of the market faces little or no competition. Externalities occur if the demand price does not reflect the overall value of the commodity exchanged or if the supply price does not reflect the overall opportunity cost of production. Imperfect information means that either buyers or sellers lack adequate information about the commodity being exchanged.

Alternative Market Structures

The degree of competition among buyers or sellers determines the basic structure of a market. The four most common types of market structures are based on differing numbers of competitors on the supply-side of the market.
  • Perfect Competition: An ideal market characterized by a large number of sellers (buyers, too), such that none is able to influence the price.

  • Monopolistic Competition: A market characterized by a large number of sellers, each with a small degree of control over the price.

  • Oligopoly: A market characterized by a small number of sellers, each with significant control over the price.

  • Monopoly: A market characterized by a single seller that is able to dominate the supply-side of the market.
Three additional, and less well-known, market structures result from different degrees of competition on the demand-side of the market.
  • Monopsonistic Competition: A market characterized by a large number of buyers, each with a small degree of control over the price.

  • Oligopsony: A market characterized by a small number of buyers, each with significant control over the price.

  • Monopsony: A market characterized by a single buyer that is able to dominate the demand-side of the market.

A Market-Oriented Economy

Markets are one of two methods used by society to allocate resources. The other is government. While real world economic systems use both, they rely on each to different degrees. A market-oriented economy (also termed capitalism) makes extensive use of markets, with a modest amount of government intervention. Government intervention is generally aimed at, or justified by, the correction of market failures.

<= MARGINALLY-ATTACHED WORKERSMARKET ADJUSTMENT =>


Recommended Citation:

MARKET, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2017. [Accessed: October 21, 2017].


Check Out These Related Terms...

     | market demand | market supply | competition | exchange | price | quantity | competitive market |


Or For A Little Background...

     | scarcity | three questions of allocation | opportunity cost | first rule of scarcity | fourth rule of competition | graphical analysis | economic thinking | production possibilities | model | efficiency | invisible hand | good | service | abstraction |


And For Further Study...

     | competitive market | voluntary exchange | Marshallian cross | market equilibrium | market adjustment | comparative statics | market-oriented economy | capitalism | economic system | macroeconomic markets | elasticity | price elasticity of demand | price elasticity of supply | barter | medium of exchange |


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