Market: Definition and Importance | Economics

In this article we will discuss about:- 1. Definition of Market 2. Conditions Governing the Extent of the Market 3. Functions of Markets 4. Importance of Markets.

Definition of Market:

In ordinary speech, the term ‘market’ refers to a place where buyers and sellers meet for transactions, e.g., Vardaan Market of Calcutta, Palika Bazar of New Delhi, Crawford Market of Mumbai and so on. But in economics it is used in a different sense.

In economics, the term ‘market’ does not mean a particular palace, rather it refers to a particular commodity which is bought and sold, e.g., the rice market, the cloth market, the gold market and so on. It is used to indicate a commodity or service as also their buyers and sellers who are in direct competition with one another. So, a market consists of a group of buyers and sellers in sufficiently close contact with one another for exchange to take place among them.

In the above sense there is no restriction of locality. The market may be local, national or international depending on the commodities which are bought and sold. Local markets are found for the local produce or for the perishable commodities (e.g., vegetables, milk, eggs, etc.) or for animals like goats, horses, cows, etc. The market of wheat or cloth or gold is both national and international as these goods are bought and sold widely.

Thus, the essential elements of an economic market are:

(i) A particular commodity or a factor, and

(ii) A large number of buyers and sellers in direct contact as also in competition with one another.

The function of a market is to enable an exchange of goods and services to take place a means by which buyers and sellers are brought into contact with one another.

Conditions Governing the Extent of the Market:

The market may be small or large in size. The market of fish or milk or perishable good is small and narrow, as it covers only a small area. But the market of goods like wheat, cement, automobiles, petrol, steel or gold is very wide as these are bought and sold all over the world. In modern times the use of cold storage has widened the market for some commodities (e.g., potatoes, fruits, fishes, eggs, etc.) which had previously very limited markets.

There are some factors which govern the extent of a market.

The follow­ing conditions favour the development of a wide market for commodities:

(1) Extensive demand and supply, i.e., many buyers and sellers:

If a commodity has a wide demand, it is likely to have a wide market. The market of wheat is wider than that of wool, because the latter has a limited demand in warm countries while wheat is demanded almost everywhere. Similarly, the limited supply of a commodity (e.g., works of art, etc.) may make its market very narrow.

(2) Durability:

A very wide market cannot exist in perishable goods because these cannot be stored for some time and because these cannot be transported. A commodity which lasts for a long time can be sent to distant places and so has a wide market (e.g., the markets for cotton-textiles, electrical goods, wrist watches, etc.).

(3) Portability of the commodity:

Portability means the easy transferabil­ity of the thing from one place to another. Some goods (e.g., gold, silver, synthetic goods, cotton textiles, etc.) can be easily and cheaply sent from one place to another. These goods have wide markets. But bulky articles of low value like bricks and sand cannot be easily transported and so they have limited markets.

(4) Cognizability:

Certain things can be easily recognised. For example, jute or raw cotton goods having distinct patents and trade-marks, etc. can be easily differentiated and recognised. A buyer can place orders for the supply of such commodities to a seller at a distant place, mentioning only the grade or brand and the quantity wanted. Hence there is a wide market for such things.

(5) Suitability for grading and sampling:

A commodity can be easily recognised only when it can be properly graded and known through speci­mens. Cotton, wheat, jute, standardised goods with distinct brand-names and trademarks can be easily sold through specimens, and for this reason these goods have wide markets. But cattle, horses and second hand cars are obviously not purchasable without proper inspection.

(6) Other factors:

Various other factors like peace and security in the country, business conditions, the government’s fiscal policy, etc. also influ­ence the extent of the markets for different commodities.

Functions of Markets:

Organised markets are concerned with the distribution of goods from the manufacturers via the wholesalers and retailers to the final con­sumers. These markets are vital to the whole process of production. As far as the economic significance and functions of markets are concerned.

The following four points may be noted:

(a) Their most obvious function is to bring together buyers and sellers usually in the same place.

(b) They also reduce price fluctuations due to the seasonal nature of the product. One function of market specialists is to carry stocks of goods in order to prevent prices falling too rapidly in periods of high output, or rising too rapidly in periods of low output. They thus benefit producers in the first case and consumers in the second.

(c) In this connection speculators, who are often condemned, contribute to stability by buying when prices are low (thus preventing prices falling further) and releasing their stocks as prices rise (thus preventing prices rising too far).

(d) Finally, the establishment of centralised markets allows both produc­ers and consumers to take advantage of the specialised services which can only be sustained where markets are large enough to lead to economies of scale.

Importance of Markets:  

The market is the place where goods are exchanged. Here, buyers and sellers talk about the articles and determine the price at which purchase and sale will be made. To quote Bates and Parkinson, “It is preferable to speak of the market as the area in which producers, both manufacturers and distributors, compete and in which buyers seek to satisfy their wants.” In fact, the nature of the marketing problem depends on the product itself as also to some extent on the geographical distribution of markets and incomes.

Markets are valuable institutions. They facilitate trade. More trade means more production. More production means more employment and a higher national income. Markets are, therefore, essential for the development of industries and the economic growth of a country.

Markets and consumers are never static. They may change because of changes in buyers’ incomes, or changes in tastes or preferences, or increasing competition. The changes may be due to changes in population, birth rates, marriage rates, age structure of the population, its geographical distribution and so on.

To conclude, however, goods and services, including labour and capital services, are bought and sold in a multitude of markets, ranging in size from a village to the world. The key actors in each market are buyers and sellers, businesses buying labour from households, households buying from busi­nesses, borrowers seeking loans from lenders, and so on.

The market is a coordinating device, which brings buyers and sellers together and mediates their conflicting interests. It can also be viewed as a decision making device. How many people will be employed as bricklayers and how many as restaurant workers? The market answers such questions, but so implicity that its effectiveness is likely to be overlooked unless one asks oneself how these questions would be answered in the absence of markets.