Market: Meaning, Features and Its Extent | Microeconomics

In this article we will discuss about:- 1. Meaning of Market 2. Characteristic Features of a Market 3. Extent 4. Classification.

Meaning of Market:

In ordinary language, we mean by market a particular place where there is a crowd of shops and where a large number of buyers and sellers assemble to buy and sell goods. For example, if the buyers and sellers of fish assemble at a place for buying and selling fish, we call the place a fish market.

Similarly, there may be a fruits market, a vegetables market, or a rice market. However, in economies, the word “market” has a special and wide meaning.

In the economic system of a country, the households buy consumer goods at given prices and sell different factor inputs. The business firms, on the other hand, sell the goods produced by them at given prices and buy the factor inputs.

The social or institutional relation that has historically evolved between the buyers and sellers is called ‘market relation’ in economics, and the social system of buying and selling goods and factor inputs is called the ‘market system’. In economics, by the market for a good, or, for a factor input, we understand both this market relation and the market system.

Characteristic Features of a Market:

The characteristic features of the market for a good or for a factor input that are known from the above definitions of market are:

(i) Presence of Buyers and Sellers:

There are two sides in the market for a good—the buyers’ side and the sellers’ side. Transactions are conducted between buyers and sellers in the market. The sellers sell the commodity at a particular price and the buyers buy it—this is called the price-rule. The ownership of the good is transferred in the market through purchase and sale according to the price-rule—the ownership is transferred from the sellers to the buyers.

(ii) The Communication between the Buyers and the Sellers:

Development of a communication system between the buyers and sellers is a precondition for the market relation to grow between them. The buyers and sellers may meet face to face at a particular place, or, there may be communication between them through the modern telecommunication system.

(iii) Establishment of the Market Relation between the Different Basic Units of the Economic System:

Centring around the purchasing and selling activities in the markets for consumer goods and factor inputs, market relation grows between the two basic units of the economic system. These units are households and firms.

The market relation that grows between them is an economic relation and, more generally, it is a social relation. The essence of this relation is that the buyers and sellers are engaged in the transactions in the market with a view to fulfilling their economic goals and they would have to obey the social rules of the market.

(iv) Price Determination through Interactions between Demand and Supply and the Price-Rule:

In the market for a good or a factor, the buyers and sellers remain aware of the prevailing conditions in the market as they all behave as economic beings. That is, they are aware of what items are being sold and purchased in the market and at what prices, who are the buyers and sellers in the market, so that the buyers may buy at the minimum possible price and the sellers can sell at the maximum possible price.

As a consequence of this, an equilibrium price of the item is determined in the market through a process of interactions between demand and supply. At this price the demand for and supply of the concerned item would be equal. The buyers and sellers all accept this price and accordingly decide on the quantity to buy and sell. This is the price-rule or the social rule referred to in (i) and (iii) above.

The main point about this rule is that no buyer would accept a larger price and no seller would accept a smaller price than the one that has been determined in the market. For then their goal of purchasing or selling in the most gainful way would not be fulfilled.

Again, no buyer would seek to buy and no seller would want to sell at a price which is, respectively, smaller than or greater than the price determined in the market, for then they would not be able to find a seller or a buyer.

Extent of a Market:

By the extent of the market for a good, we mean the’ expansion of the demand for the good, which is the same thing as the expanse of its sale. The market for a good may, or may not, be geographically well spread but if the quantity sold of it is fairly large, then we may say that the market is well extended.

Factors Determining the Extent of the Market:

The extent of the market for a good generally depends on the natural characteristics of the good.

These are:

(i) Extent of its Use:

If a good has a large number of uses, the extent of its market would be relatively large. Electricity is a good which has a large number of uses. It is used at home for the purposes of cooking, lighting, ironing of clothes, etc.

Again, in industry and agricultural farms, electricity is the chief source of power. That is why the extent of the market for electricity is very large, i.e., demand for electricity or the sale of electricity is very large.

(ii) Transportability:

There are some goods like wrist watches, gold and jewellery ornaments, that can be easily transported from their production centres to different places within or outside the country. Their demand or market may be relatively more expanded and widespread.

On the other hand, there are some other goods which are large in size, bulk and weight, e.g., bricks for building houses. The transportation of these goods to different places is difficult and costly. That is why the extent of their market is relatively small. These goods can be sold only in the local markets. If they are to be sold in the far-away markets, their transport costs and, therefore, prices would be prohibitively high.

(iii) Development of Market Economy:

The basic point about the market economy is production for the market, i.e., production for sale. Prior to the development of market economy in a country, the producers of goods used a sizeable proportion of their product for their own consumption.

For the development of market economy, the market system or market organisations should be developed. If, in an economy, use of money becomes widespread, banking and insurance sectors are well organised, transport and communication systems are developed, then, generally, the markets for all the goods are extended.

Here we should also remember that maintenance of political stability, peace and security is the primary precondition for the development of a market economy.

(iv) Phase of the Business Cycle:

In a capitalistic economy, there are business cycles— business recessions and booms come here in cycles. That is why the extent of the markets of all the goods, in general, would depend upon the phase of the business cycle. In booms, the extent of the markets would be larger than in the periods of recession.

(v) Transport and Communication System:

One of the important preconditions of whether the markets would be widespread or not is the development of the system of transport and communication. Goods and services should be able to move freely within the country.

For this, water, surface and air transport systems should be developed and modernised. Modern information technology-based communication should be developed so that the buyers and sellers may communicate among themselves and exchange of business information may take place freely.

Similarly, transport and communication system between a country’s home market and the international market should be modernised.

(vi) Government Policy:

The extent of market for goods and services also depends upon the policies of the government. If the government imposes more and more taxes the markets for the goods concerned would contract through an increase in their prices. On the other hand, if the government grants subsidies on the sale of some good, its price will diminish and its market will expand.

Classification of Markets:

The markets for goods and factor inputs may be of different types.

Here we shall mention four types of market classification:

I. Classification of Markets on the Basis of their Geographical Spread. Here, there are Three Classes of Markets:

(i) Local markets for perishable goods like fish, eggs, vegetables. The geographical area for these markets is rather small.

(ii) National market for goods that are not perishable and for which the transport cost is not too much for their price. National market is spread over the whole country. The prices of the goods that are sold in this market are determined on the basis of demand and supply for the whole country. That is why these prices do not differ considerably over the different regions of the country.

(iii) International market for the goods those are produced within a country and sold within the country, and also outside. Also, there are some goods that are produced in the country only to be exported to the foreign countries. The Indian goods which have traditionally an international market are those manufactured in jute, sugar, cotton textile, engineering and leather industries, and also tea.

At present the list of Indian goods which are exported is ever- increasing. The prices of these goods in the national market are called their national prices and the prices that are obtained in the international market are called their international prices. The international prices mainly depend on the elasticity of demand for the goods in the foreign markets.

II. Classification of Markets on the Basis of the Items Bought and Sold:

For example, the market for jute products is called the jute market. Similarly, we may have sugar market, gold market, labour market, fish market, vegetables market, share market, bond market, and so on. Some of these markets are national markets and some may be regional or local markets.

III. Classification of Markets on the Basis of the Length of Time:

According to the neo­classical economist, Sir Alfred Marshall, the length of time has an important role to play in the process of the determination of the prices of goods and services.

That is why markets are divided into four classes according to the length of time:

(i) Very Short-Period Market:

From its very name it is clear to us that the length of time allowed in this market for necessary adjustments is very short. For example, the market activities of the buyers and sellers of a good in the short span of the morning of a day may be called a very short-period market for the good.

In a very short-period market, the time is too short to allow any change in the supply of the good, i.e., supply of the good remains constant in this market. Therefore, here supply plays a passive role, or, we may even say, supply plays no role in the process of price determination in this market.

On the other hand- here demand plays an active role. If demand increases or decreases, supply remaining constant, the price of the good in this market, consequently, increases or decreases.

(ii) Short-Period Market:

The length of time in the short-period market is longer than the very short period. In the short period, it is possible for the firm to increase (or decrease) the supply of its output by using more (or less) of the variable inputs like raw materials, fuel and labour. But the short period is too short to change the quantities used of the so called fixed inputs.

Since the supply of the good may increase in the short period, though to a limited extent, supply in this period has a role to play in the determination of the price.

(iii) Long-Period Market:

The length of time in the long period is so long that the firm now may increase (or decrease) the quantities used of both the variable and the fixed inputs. As a result, if the demand for the good increases and price in the very short period jumps up, then, in the long period, supply may increase adequately and most of the price rise may be corrected subsequently.

Therefore, in the long period, supply plays an equally active role with demand in the process of price determination.

(iv) Very Long-Period Market:

The very long period is so long that there may be a change of age. In the new age, there may be a notable change in the population of the country and the tastes and preferences and habit of the people may also change considerably; also there may be a qualitative change in technology and social institutions and organisations.

In the very long period, all these changes may have their full impact on the production and supply of the goods and also on their demand and price.

IV. Classification of Markets on the Basis of Degree of Competition:

This classification of markets is most important in economics. For the degree of competition prevailing in the goods and factor markets determines the degree of mutual interdependence (or otherwise) of the business firms in the matter of decision-making.

Markets are divided in respect of degree of competition into following classes:

(i) Perfectly Competitive Markets.

(ii) Monopoly or Monopolistic Markets.

(iii) Monopolistic Competition.

(iv) Oligopoly.

(v) Monopsony and Oligopsony.

(vi) Bilateral Monopoly.