Any time goods or services are bought and sold it represents activity that has taken place in a market. A market is a place or situation where buyers and sellers of goods or services come together in exchange, namely to exchange a good or a service. In a market, the rate of exchange is the price of the good or service that is being sold. For a market to develop, there must be both a willingness to purchase a product (i.e. a demand for the product) and a willingness to produce or supply a product (i.e. a supply of the product).
All buyers and sellers will have some idea about the ‘value’ they place on a product, however the exchange will only take place in a market if ‘the price is right’. This means that the price must be at a level where both the buyer and seller believe that the exchange makes them better off. This usually involves a compromise along the way because the seller wants to receive the highest price possible and the buyer wants to pay the lowest price. As the selling price falls, the buyer is relatively better off and the seller relatively worse off. Similarly, as the selling price increases, the buyer is relatively worse off and the seller relatively better off. Who gains more from the market transaction will depend upon a number of factors that will be explored shortly. The bottom line is that exchange will not occur (and therefore there will be no market activity) if one of the parties to any possible transaction believes that they will be made worse off by either buying or selling the product.
Some products in markets might be on sale for a substantial period of time without a buyer being prepared to pay the asking price . This will usually occur because the sale price is too high. At this price, potential buyers do not believe they will be better off because the value they place on the product is below the asking price. Accordingly, the exchange will only occur if the seller reduces the price. This situation occurs most frequently in property markets, where houses can be on sale for many months, with the vendors (sellers) and prospective buyers unwilling to compromise.
Typically, a market will occur in a physical place where those who demand products (buyers) and those who supply the products (sellers) gather to exchange goods or services at a price. For example, fruit markets in town centres attract sellers who offer their goods for sale and potential buyers physically go to these markets in order to purchase the products for sale. Similarly, with property markets, many sales will take place at the property’s location, particularly if the property is auctioned.
There are, however, other markets that do not involve a physical meeting place for buyers and sellers. Instead they rely on communications technology to bring the buyers and sellers together. eBay and other online sites act just like fruit markets, providing the means for buyers and sellers of products to come together in exchange but without ever meeting up in person. Similarly, the stock market brings buyers and sellers of shares together in exchange, but there is no physical meeting between the buyer and seller, and the trade usually takes place online.
Note that anything that has been sold in the economy must have been sold in a market of some sort. There are literally hundreds of different types of markets, such as property markets, labour markets, financial markets, share markets, export markets, currency markets, commodity markets, bond markets, black markets etc. It is also possible for the sale of one product to be considered a transaction that has taken place in more than one market. For example, if a farmers sells one hundred thousand head of cattle to Indonesia, this can be considered activity that has taken place in the ‘cattle’ market, the ‘agricultural’ market, the ‘commodity’ market or even the ‘export’ market.