Market

MARKET

A market exists when a buyer and a seller exchange money for a product or service in a transaction in which neither person is forced into the exchange. Markets can be as simple as children selling lemonade for a nickel or as complex as the international trade in cars, steel, or telecommunications.

The most important question in any market is the setting of the price. Economists since the days of British economist Adam Smith (1723–1790) have noted that prices tend to fluctuate with supply and demand. If, for example, a farmer offers his crop of wheat for sale at a given price and no one buys, she or he will lower the price to try to attract buyers. On the other hand, if there is a scarcity of the product, sellers will be able to charge more for it. In this way prices are set for thousands of products in many markets every day.

The free flow of information is essential to the efficient operation of markets. If a buyer knows that cars are cheaper at one dealership than another, she or he will buy at the less expensive dealership. But if this information is not available, the buyer may spend more money than necessary. This would leave less money to spend on something else, and thus markets would be less efficient. Information, then, is essential, whether passed by word of mouth, newspaper advertisements, or other means. Sellers sometimes try to restrict such information or scheme to keep prices high. Economists refer to such schemes as price-fixing or collusion, and governments generally outlaw such practices.

Economists also believe it is important that governments don't unduly restrict the operation of free markets with burdensome taxes or regulation. Some regulation may be necessary; for example, some regulations protect the health and safety of workers. But when governments restrict the sale of a commodity, such as automobiles, to a single state-controlled brand at an artificial price, then economists say such a market is no longer free. Markets in the former Soviet Union were not free, which is why an illegal market in food and other essential goods and services flourished side by side with official ones. Economists call these illegal markets the underground economy or black markets. Such markets tend to spring into existence in any country whenever government taxes or regulations restrict the sale or supply of a product.

See also: Price, Supply and Demand