Markets: Definition, Classification, Condition and Extent of the Market

Definition of a Market:

Ordinary Meaning:

The term ‘Market’ needs explaining, as it has got a different meaning in Economics from what it means ordinarily.

In everyday language, the term ‘market’ is used in the sense of a particular locality or a place where the buyers and sellers of a commodity assemble and strike bargains.

“Economists understand by the ‘market’ not any particular market place in which things are bought and sold but the whole of any region in which buyer and sellers-are in such free intercourse with one another that the prices of the same goods tend to equality easily and quickly.” –Cournot.

The commodity is either displayed or stocked there. The exact Hindustani equivalent for ‘market is ‘mandi’. Almost every town has a ‘mandi’ and a big city has several of them. A ‘mandi’ encloses a big square with shops all round. The commodity is displayed on the platform in front of the shops or is stocked in the godowns.

The sellers of the commodity bring it into the ‘mandi’ in carts from the neighbouring villages. The buyers and their agents, brokers or ‘dalals’, also reach the place. The bargain is struck in the presence of the buyers and sellers. This is what the term ‘market’ signifies in the ordinary language.

In Economic Sense:

But in Economics the term ‘market’ is used in an entirely different sense. Here it has no reference to a particular place. The buyers and sellers need not assemble anywhere. They may be living in distant places. Their coming together is unnecessary. They can do business with the help of the telephone, the telegraph or ordinary post. In this sense, a wheat market does not necessarily mean a ‘kanak mandi’, where the businessmen assemble to buy and sell wheat, but it stands for growers of wheat to whichever place they may belong, and the purchasers of wheat, wherever they may live, if they are in contact with each other.

Cournot’s Definition:

The French economist Cournot defined a market, thus:

“Economists understand by the ‘market’ not any particular market place in which things are bought and sold but the whole of any region in which buyer and sellers-are in such free intercourse with one another that the prices of the same goods tend to equality easily and quickly.”

Implications of Cournot’s Definition:

This definition of a market brings out the following essential points:

(a) A market covers a region, which may be a district, state, country, or even the whole world com which buyers and sellers are drawn, and not any particular place where-they assemble.

(b) There must be commercial intercourse among the dealers, i.e., buyers and seller they must be in touch with one another, so that they are aware of the prices offered or accepted by other buyers and sellers.

(c) The same price must rule for the same thing at ‘he same time.

Modern Definition:

The modem view regarding market is, however, different from Cournot’s definition given above. While the old definition laid particular stress on a commodity having the same price at the same time, the economists of today do not emphasize the uniformity of price. They hold that the same price obtains only in a perfect market and not in an imperfect market, and that, in real life, most markets sere imperfect, i.e., competition in them is not perfect.

The widely-accepted definition of a market, therefore, is that “it (market) implies the whole area over which buyers and sellers are in such touch with each other, directly or through middlemen, that the price of the commodity in one part influences it in the other pans of it”.

Essential Points in Modem Definition:

Thus, the following three points need to be noticed in regard to the modern definition of a market:

(a) The existence of a commodity for example, the market, for gold, cotton, wheat. There will thus be as many markets as are commodities and if there be several types or varieties of a commodity, then each type or variety will have a separate market of its own.

(b) That there be buyers and sellers who are in touch with one another either through post, telegraph, telephone or through middlemen.

(c) That there be competition among buyers and competition among sellers, whether perfect or imperfect, so that through such competition, the price of the commodity in question is influenced.

Classification of Markets:

Markets can be classified on several bases as under:

(a) On the geographical basis, i.e., the area of their operations. We have a local market, national market and the world market.

(b) On the functional basis, i.e., the manner in which they function or the business they transact, we have mixed or general markets and specialized markets like the produce exchange, stock exchange, money market and foreign exchange market.

(c) On the basis of the nature of competition prevailing in the market, we have perfect and imperfect markets.

Perfect and Imperfect Markets:

A distinction may be made between a perfect market and an imperfect market. This corresponds to perfect and imperfect competition.

Perfect Market:

“A market is said to be perfect when all the potential sellers and buyers are promptly aware of the prices at which transactions take place and all the offers made by other sellers, and buyers, and when any buyer can purchase from any seller and conversely. Under such a condition, the price of a commodity will tend to be the same (after allowing for cost of transport including import duties) all over the market.” Every quality of the commodity is regarded as a separate commodity. The prevalence of the same price for the same commodity or at the same time is the essential characteristic of a perfect market.

Imperfect Market:

On the other hand, a market is said to be imperfect when some buyers or sellers or both are not aware of the offers being made by others. Naturally, therefore, different prices come to prevail for the same commodity at the same time in an imperfect market, whereas in a perfect market the same price rules throughout the market.

Conditions of a Perfect Market:

The following are the main conditions which must be fulfilled before a perfect market can develop:

(a) Free Competition:

Competition between buyers and buyers on the one hand, sellers and sellers on the other, as well as between buyers and sellers, must be absolutely free. There should be no monopolist either on the buyers’ side or on the side of the sellers. A monopolist is usually in a position to charge different prices from different persons. Only when there is free competition does the same price rule in the entire market.

(b) Cheap and Efficient Means of Transport and Communication:

In order that the same price may rule in the market at the same time, it is essential that cheap means of transport and communications should be available to the buyers and sellers of the commodity. If commodities cannot be cheaply and quickly transported from one place to another, different prices might rule in a market.

Similarly, in the absence of means of rapid communication like wireless, telegraph and telephone, different prices may come to rule in different sectors of the same market. But, if the means of transport and communication are cheap and efficient, any considerable difference between prices can be removed by carrying goods from a region of low prices to that of high prices. This movement of goods will continue till the prices are equalized. In a perfect market, all the potential buyers and sellers must be promptly aware of the prices charged and offered. There should be no ignorance about such matters.

(c) Wide Extent:

It is also necessary that the market for the commodity should be as wide as possible. A limited market is usually an imperfect market. The extent of a market depends on the nature of the commodity, whether it is durable or perishable, and the nature of demand for it, whether it is steady or fluctuating.

Nature of Market in some Commodities:

For some commodities the market may be perfect and for others imperfect. For consumers’ goods of a perishable nature the market is generally imperfect. For producers’ goods like machinery it is perfect. Wholesale markets are generally more perfect than retail markets.

A labour market is less perfect, for workers lack mobility. Markets for money, gold, silver, and stocks and shares are perhaps the most perfect. For real estate, the market is less perfect. For second-hand books, the market is imperfect there being no standard price.

Extent of the Market:

There are several factors which make the markets wide or narrow.

Of these the following may be noted:

Extent of Demand:

If the demand for a commodity is universal and constant, it will have a wide market. In the case of limited or fluctuating demand, the market will be narrow. Naturally a certain type of garment, which is worn only in a particular region, cannot have a wide market.

Portability:

For a wide market, the commodity should have large value in small bulk, e.g., gold, silk, etc., so that it pays to carry it. Bulky and cheap articles like bricks are not considered portable and cannot have a wide market. The market for them is a narrow one.

Durability:

If a good is perishable, e.g., fresh fruits and milk, it cannot have a wide market. Only durable articles like gold and those which do not quickly rot, e.g., wheat, can have a wide market. Such commodities can be carried over long distances without deterioration.

Possibility of Sampling and Grading:

Those commodities have a wide market which can be easily graded or sold by sample. In such cases, even foreign customers can buy goods without being deceived Non-standardized goods cannot have a wide market.

Peace and Security:

Trade between distant places is not possible unless peace and security reign. The size of the market, therefore, depends on the state of law and order in the country. In a disturbed State, the traders in one region will feel great hesitation in entering into trade relations with traders living at a distance.

Tariff Policy of the Government:

The extent of the market also depends on the policy of the Government. Tariff walls in the shape of import duties, import restrictions or quota system restrict the market. The Government can also ban or limit export. In this way, the Government policy determines the extent of the market.