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THE MARKET
Previously we defined markets in a very general way as arrangements through which prices guide resource allocation. We now adopt a narrower definition.
A market is a set of arrangements by which buyers and sellers are in contact to exchange goods or services.
Some markets (shops and fruit stalls) physically bring together the buyer and the seller. Other markets (The London Stock Exchange) operate chiefly through intermediaries (stockbrokers) who transact business on behalf of clients. In supermarkets, sellers choose the price, stock the shelves, and leave customers to choose whether or not to make a purchase. Antique auction force buyers to bid against each other with the seller taking a passive role.
Although superficially different, these markets perform the same economic function. They determine prices that ensure that the quantity people wish to buy equals the quantity people wish to sell. Price and quantity cannot be considered separately. In establishing that the price of a Rolls Royce is ten times the price of a small Ford, the market for motor cars simultaneoused ensures that production and sales of small Fords will greatly exceed the production and sales of Rolls Royces. These price guide society in choosing what, how, and for whom to purchase.
To understand this process more fully, we require a model of a typical market. The essential features on which such a model must concentrate are demand, the behavior of buyers, and supply, the behavior of sellers. It will then be possible to study the interaction of these forces to see how a market works in practice.​
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