The Role of Markets » How Markets Work

What is a market?

Think about the last thing you bought. Maybe it was a snack at a kiosk, a game download or a phone top-up. Someone wanted to buy it and someone else was willing to sell it. When those two met and swapped, a market was at work.

The earlier lessons showed that resources are scarce, so every society must decide what to produce, how to produce and who to produce for. In many countries, a large part of that job is done through markets. This lesson looks at what a market is. Later lessons show how markets set prices.

Key terms:

• Market: anywhere that buyers and sellers come together to exchange goods and services.
• Buyer (consumer): a person, firm or government that buys goods and services.
• Seller (producer): a person or firm that makes goods and services, or sells them on, to earn money.

A market can be a place or online

A market does not have to be a field full of stalls. What matters is that buyers and sellers can get in touch with each other and agree an exchange.

Phone calls, apps and websites all count. If buyers and sellers can come together and trade, there is a market.

Examples of markets

There are many different markets. You need to know several kinds, and you should be able to give an example of each.

Type of market	What is traded	Example
Product market	Goods and services	Bread, shoes, haircuts, bus journeys
Labour market	Workers' time and skills	Firms look for nurses and teachers; people look for jobs
Foreign exchange market	Currencies	A tourist swaps dollars for euros

Markets can also be grouped by how wide they are:

• Local market: serves one town or area, such as a village bakery or a farmers' market.
• National market: covers a whole country, such as a nationwide chain of phone shops.
• International market: buyers and sellers are in different countries, such as coffee grown in one country and sold to buyers in many others.
• Online market: trade takes place on the internet and can be local, national or international.

The same good can be sold in more than one of these. A hand-made bag might be sold at a local craft fair and also on a website to buyers across the world.

The role of buyers

Buyers (also called consumers) are the people, firms or governments that want to purchase goods and services. A household buys food. A firm buys machines and materials. A government buys books for schools.

What buyers want: the most satisfaction from the money they have. In practice that usually means a good that does the job, of good quality, at a low price. Buyers are limited by how much money they have, so they have to choose, just like the opportunity cost choices in an earlier lesson.

The role of sellers

Sellers (also called producers) are the firms or people who supply goods and services. A farmer sells maize. A tailor sells clothes. A shop sells goods that someone else made.

What sellers want: to earn money from what they sell, and usually to make a profit. They want a high price and plenty of customers, so that their income is higher than their costs.

Why buyers and sellers need each other

Buyers and sellers want opposite things when it comes to price, yet each needs the other. A seller with no buyers earns nothing. A buyer with no sellers cannot get what they need. A sale only happens when both sides agree.

Exam-style question

Marta makes leather bags in the made-up country of Dorvia. She sells them at a local craft fair and on a website to buyers in other countries.

(a) Define a market. [2 marks]

(b) Identify one type of market from the information. [1 mark]

(c) Describe what Marta, as a seller, wants from the sale of her bags. [2 marks]

(d) Explain why Marta and the buyers of her bags need each other. [3 marks]