How markets work

Markets are commonly thought of as specific places where buyers and sellers meet: shops, street markets or specialised markets, like Stock Exchanges for shares, or Commodity Markets for goods such as grain, coffee and metals. However, a market is not confined to a particular place. On the Commodity and Stock Markets, for example, the buyers are not usually buying for themselves, but are middlemen acting on behalf of clients scattered throughout the world, with who they are in close contact by telephone and telex. A market may be defined as any area over which buyers and sellers are in contact, directly or through dealers, and where prices obtainable in one part of the area can influence prices in another part.

There are markets for thousands of things. Some of these things are tangible, while others are intangible. These things are referred to as products. So, product markets can be divided into two classes: goods and services.

A good is something tangible that is produced and consumed and purchased in a market. A service is something intangible that is produced and consumed and purchased in a market. Some people come to the market to buy (demanders), others come because they want to sell (suppliers). The interaction of demanders and suppliers determines a market price and market allocation of commodities.

Each of markets has its own special features, called market structure by economists – the characteristics of the buying and selling side and the type of product – which will determine the behaviour of prices. For example, where goods are perishable, such as cut flowers and fruit, prices are more variable than for storable goods. In the latter case, temporary fluctuations in demand can be met by allowing a rise or fall in stock. In a free market the relative price for a commodity increases if there is excess supply, and increases if there is excess demand. The prices of shares and foreign exchange rates may also be volatile for quite different reasons, reflecting frequently revised expectations about future events. A market is in equilibrium when the quantity supplied at a specific price is equal to the quantity demanded at the same market price.