economics Economics () is the social science that studies the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods and services. Economics focuses on the behaviour and intera ...

, a market is a composition of

system A system is a group of Interaction, interacting or interrelated elements that act according to a set of rules to form a unified whole. A system, surrounded and influenced by its environment (systems), environment, is described by its boundaries, ...

institution Institutions are humanly devised structures of rules and norms that shape and constrain individual behavior. All definitions of institutions generally entail that there is a level of persistence and continuity. Laws, rules, social conventions a ...

s, procedures,

social relation A social relation or also described as a social interaction or social experience is the fundamental unit of analysis within the social sciences, and describes any voluntary or involuntary interpersonal relationship between two or more individuals ...

s or

infrastructure Infrastructure is the set of facilities and systems that serve a country, city, or other area, and encompasses the services and facilities necessary for its economy, households and firms to function. Infrastructure is composed of public and priv ...

s whereby parties engage in

exchange Exchange may refer to: Physics *Gas exchange is the movement of oxygen and carbon dioxide molecules from a region of higher concentration to a region of lower concentration. Places United States * Exchange, Indiana, an unincorporated community * ...

. While parties may exchange goods and services by

barter In trade, barter (derived from ''baretor'') is a system of exchange in which participants in a transaction directly exchange goods or services for other goods or services without using a medium of exchange, such as money. Economists distingu ...

, most markets rely on sellers offering their goods or services (including

labour power Labour power (in german: Arbeitskraft; in french: force de travail) is a key concept used by Karl Marx in his critique of capitalist political economy. Marx distinguished between the capacity to do work, labour power, from the physical act of w ...

) to buyers in exchange for

money Money is any item or verifiable record that is generally accepted as payment for goods and services and repayment of debts, such as taxes, in a particular country or socio-economic context. The primary functions which distinguish money are as ...

. It can be said that a market is the process by which the prices of goods and services are established. Markets facilitate

trade Trade involves the transfer of goods and services from one person or entity to another, often in exchange for money. Economists refer to a system or network that allows trade as a market. An early form of trade, barter, saw the direct excha ...

and enable the distribution and

allocation of resources In economics, resource allocation is the assignment of available resources to various uses. In the context of an entire economy, resources can be allocated by various means, such as markets, or planning. In project management, resource allocation ...

in a society. Markets allow any tradeable item to be evaluated and

price A price is the (usually not negative) quantity of payment or compensation given by one party to another in return for goods or services. In some situations, the price of production has a different name. If the product is a "good" in the c ...

d. A market emerges more or less spontaneously or may be constructed deliberately by human interaction in order to enable the exchange of rights (cf.

ownership Ownership is the state or fact of legal possession and control over property, which may be any asset, tangible or intangible. Ownership can involve multiple rights, collectively referred to as title, which may be separated and held by different ...

) of services and goods. Markets generally supplant gift economies and are often held in place through rules and customs, such as a booth fee, competitive pricing, and source of goods for sale (local produce or stock registration). Markets can differ by products (goods, services) or factors (labour and capital) sold,

product differentiation In economics and marketing, product differentiation (or simply differentiation) is the process of distinguishing a product or service from others to make it more attractive to a particular target market. This involves differentiating it from com ...

, place in which exchanges are carried, buyers targeted, duration, selling process, government regulation, taxes, subsidies,

minimum wage A minimum wage is the lowest remuneration that employers can legally pay their employees—the price floor below which employees may not sell their labor. Most countries had introduced minimum wage legislation by the end of the 20th century. Bec ...

price ceiling A price ceiling is a government- or group-imposed price control, or limit, on how high a price is charged for a product, commodity, or service. Governments use price ceilings ostensibly to protect consumers from conditions that could make com ...

s, legality of exchange, liquidity, intensity of speculation, size, concentration, exchange asymmetry,

relative price A relative price is the price of a commodity such as a good or service in terms of another; i.e., the ratio of two prices. A relative price may be expressed in terms of a ratio between the prices of any two goods or the ratio between the price o ...

s, volatility and geographic extension. The geographic boundaries of a market may vary considerably, for example the food market in a single building, the real estate market in a local city, the consumer market in an entire country, or the economy of an international

trade bloc A trade bloc is a type of intergovernmental agreement, often part of a regional intergovernmental organization, where barriers to trade (tariffs and others) are reduced or eliminated among the participating states. Trade blocs can be stand-alon ...

where the same rules apply throughout. Markets can also be worldwide, see for example the global

diamond trade Diamond is a solid form of the element carbon with its atoms arranged in a crystal structure called diamond cubic. Another solid form of carbon known as graphite is the chemically stable form of carbon at room temperature and pressure, b ...

. National economies can also be classified as

developed market In investing, a developed market is a country that is most developed in terms of its economy and capital markets. The country must be high income, but this also includes openness to foreign ownership, ease of capital movement, and efficiency of ma ...

s or

developing market A developing country is a sovereign state with a lesser developed industrial base and a lower Human Development Index (HDI) relative to other countries. However, this definition is not universally agreed upon. There is also no clear agreeme ...

s. In

mainstream economics Mainstream economics is the body of knowledge, theories, and models of economics, as taught by universities worldwide, that are generally accepted by economists as a basis for discussion. Also known as orthodox economics, it can be contrasted to h ...

, the concept of a market is any structure that allows buyers and sellers to exchange any type of goods, services and

information Information is an abstract concept that refers to that which has the power to inform. At the most fundamental level information pertains to the interpretation of that which may be sensed. Any natural process that is not completely random ...

. The exchange of goods or services, with or without

, is a

transaction Transaction or transactional may refer to: Commerce * Financial transaction, an agreement, communication, or movement carried out between a buyer and a seller to exchange an asset for payment *Debits and credits in a Double-entry bookkeeping sys ...

Market participant The term market participant is another term for economic agent, an actor and more specifically a decision maker in a model of some aspect of the economy. For example, ''buyers'' and ''sellers'' are two common types of agents in partial equilibrium ...

s consist of all the buyers and sellers of a

good In most contexts, the concept of good denotes the conduct that should be preferred when posed with a choice between possible actions. Good is generally considered to be the opposite of evil and is of interest in the study of ethics, morality, ph ...

who influence its

, which is a major topic of study of

economic An economy is an area of the Production (economics), production, Distribution (economics), distribution and trade, as well as Consumption (economics), consumption of Goods (economics), goods and Service (economics), services. In general, it is ...

s and has given rise to several theories and

models A model is an informative representation of an object, person or system. The term originally denoted the plans of a building in late 16th-century English, and derived via French and Italian ultimately from Latin ''modulus'', a measure. Models c ...

concerning the basic market forces of

supply and demand In microeconomics, supply and demand is an economic model of price determination in a Market (economics), market. It postulates that, Ceteris paribus, holding all else equal, in a perfect competition, competitive market, the unit price for a ...

. A major topic of debate is how much a given market can be considered to be a "

free market In economics, a free market is an economic system in which the prices of goods and services are determined by supply and demand expressed by sellers and buyers. Such markets, as modeled, operate without the intervention of government or any o ...

", that is free from

government intervention Economic interventionism, sometimes also called state interventionism, is an economic policy position favouring government intervention in the market process with the intention of correcting market failures and promoting the general welfare of ...

. Microeconomics traditionally focuses on the study of market structure and the efficiency of

market equilibrium In economics, economic equilibrium is a situation in which economic forces such as supply and demand are balanced and in the absence of external influences the ( equilibrium) values of economic variables will not change. For example, in the st ...

; when the latter (if it exists) is not efficient, then economists say that a

market failure In neoclassical economics, market failure is a situation in which the allocation of goods and services by a free market is not Pareto efficient, often leading to a net loss of economic value. Market failures can be viewed as scenarios where indiv ...

has occurred. However, it is not always clear how the allocation of resources can be improved since there is always the possibility of

government failure Government failure, in the context of public economics, is an economic inefficiency caused by a government intervention, if the inefficiency would not exist in a true free market. The costs of the government intervention are greater than the bene ...

Definition

In economics, a market is a coordinating mechanism that uses prices to convey information among economic entities (such as firms, households and individuals) to regulate production and distribution. In his seminal 1937 article "

The Nature of the Firm "The Nature of the Firm" (1937) is an article by Ronald Coase. It offered an economic explanation of why individuals choose to form partnerships, companies, and other business entities rather than trading bilaterally through contracts on a market. ...

Ronald Coase Ronald Harry Coase (; 29 December 1910 – 2 September 2013) was a British economist and author. Coase received a bachelor of commerce degree (1932) and a PhD from the London School of Economics, where he was a member of the faculty until 1951. ...

wrote: "An economist thinks of the economic system as being coordinated by the price mechanism....in economic theory we find that the allocation of factors of production between different uses is determined by the price mechanism". Thus the usage of the price mechanism to convey information is the defining feature of the market. This is in contrast to a firm, which as Coase put it, "the distinguishing mark of the firm is the super-session of the price mechanism". Thus, Firms and Markets are two opposite forms of organizing production; Coase wrote: There are also other hybrid forms of coordinating mechanisms, in between the hierarchical firm and price-coordinating market(e.g.

global value chain A global value chain (GVC) refers to the full range of activities that economic actors engaged in to bring a product to market. The global value chain does not only involve production processes, but preproduction (such as design) and postproduction ...

Business Venture Venture capital (often abbreviated as VC) is a form of private equity financing that is provided by venture capital firms or funds to startups, early-stage, and emerging companies that have been deemed to have high growth potential or which ha ...

Joint Venture A joint venture (JV) is a business entity created by two or more parties, generally characterized by shared ownership, shared returns and risks, and shared governance. Companies typically pursue joint ventures for one of four reasons: to acces ...

, and

strategic alliance A strategic alliance (also see strategic partnership) is an agreement between two or more parties to pursue a set of agreed upon objectives needed while remaining independent organizations. The alliance is a cooperation or collaboration which ai ...

s). The reasons for the existence of firms or other forms of co-ordinating mechanisms of production and distribution alongside the market are studied in "The Theory of the Firm" literature, with various

complete Complete may refer to: Logic * Completeness (logic) * Completeness of a theory, the property of a theory that every formula in the theory's language or its negation is provable Mathematics * The completeness of the real numbers, which implies t ...

and incomplete contract theories trying to explain the existence of the firm. Incomplete contract theories that are explicitly based on

bounded rationality Bounded rationality is the idea that rationality is limited when individuals make decisions, and under these limitations, rational individuals will select a decision that is satisfactory rather than optimal. Limitations include the difficulty of ...

lead to the costs of writing complete contracts. Such theories include: Transaction Cost Economies by

Oliver Williamson Oliver Eaton Williamson (September 27, 1932 – May 21, 2020) was an American economist, a professor at the University of California, Berkeley, and recipient of the 2009 Nobel Memorial Prize in Economic Sciences, which he shared with Elinor Ostro ...

and Residual Rights Theory by Groomsman, Hart, and Moore. Market-Firms's dichotomy can be contrasted with the relationship between the agents transacting. While in a market the relationship is short term and restricted to the contract, in the case of firms and other co-ordinating mechanisms it is for a longer duration. In the modern world much economic activity takes place through fiat and not the market. Lafontaine and Slade (2007) estimates, in the US, that the total value added in transactions inside the firms equal the total value added of all market transactions. Similarly, 80% of all World Trade is conducted under Global Value Chains (2012 estimate), while 33% (1996 estimate) is intra-firm trade. Nearly 50% of US imports and 30% of exports take place within firms. While Rajan and Zingales (1998) have found that in 43 countries two-thirds of the growth in value added between 1980 and 1990 came from increase in firm size.

Types

A market is one of the many varieties of

s, procedures,

s and

s whereby parties engage in exchange. While parties may exchange goods and services by

, most markets rely on sellers offering their goods or services (including labour) in exchange for

from buyers. It can be said that a market is the process by which the prices of goods and services are established. Markets facilitate

and enable the distribution and

in a society. Markets allow any trade-able item to be evaluated and

d. A market sometimes emerges more or less spontaneously or may be constructed deliberately by human interaction in order to enable the exchange of rights (cf.

) of services and goods. Markets of varying types can spontaneously arise whenever a party has interest in a good or service that some other party can provide. Hence there can be a market for cigarettes in correctional facilities, another for chewing gum in a playground, and yet another for contracts for the future delivery of a commodity. There can be

black market A black market, underground economy, or shadow economy is a clandestine market or series of transactions that has some aspect of illegality or is characterized by noncompliance with an institutional set of rules. If the rule defines the se ...

s, where a good is exchanged illegally, for example markets for goods under a command economy despite pressure to repress them and virtual markets, such as

eBay eBay Inc. ( ) is an American multinational e-commerce company based in San Jose, California, that facilitates consumer-to-consumer and business-to-consumer sales through its website. eBay was founded by Pierre Omidyar in 1995 and became a ...

, in which buyers and sellers do not physically interact during negotiation. A market can be organized as an

auction An auction is usually a process of buying and selling goods or services by offering them up for bids, taking bids, and then selling the item to the highest bidder or buying the item from the lowest bidder. Some exceptions to this definition ex ...

, as a

private electronic market A private electronic market (PEM) uses the Internet to connect a limited number or pre-qualified buyers or sellers in one market. PEMs are a hybrid between perfectly open markets (e.g. exchanges where there is no pre-existing relationship between ...

, as a commodity

wholesale market Wholesaling or distributing is the sale of goods or merchandise to retailers; to industrial, commercial, institutional or other professional business users; or to other wholesalers (wholesale businesses) and related subordinated services. In g ...

, as a

shopping center A shopping center (American English) or shopping centre (Commonwealth English), also called a shopping complex, shopping arcade, shopping plaza or galleria, is a group of shops built together, sometimes under one roof. The first known collec ...

, as complex institutions such as international markets and as an informal discussion between two individuals. Markets vary in form, scale (volume and geographic reach), location and types of participants as well as the types of goods and services traded. The following is a non exhaustive list:

Physical consumer markets

Main Entrance - Stuart Saunders Hogg Market - Kolkata 2013-12-24 1394

* Food retail markets:

farmers' market A farmers' market (or farmers market according to the AP stylebook, also farmer's market in the Cambridge Dictionary) is a physical retail marketplace intended to sell foods directly by farmers to consumers. Farmers' markets may be indoors or o ...

fish market A fish market is a marketplace for selling fish and fish products. It can be dedicated to wholesale trade between fishermen and fish merchants, or to the sale of seafood to individual consumers, or to both. Retail fish markets, a type of wet mar ...

wet market A wet market (also called a public market or a traditional market) is a marketplace selling fresh foods such as meat, fish, produce and other consumption-oriented perishable goods in a non-supermarket setting, as distinguished from " dry market ...

s and

grocery store A grocery store ( AE), grocery shop ( BE) or simply grocery is a store that primarily retails a general range of food products, which may be fresh or packaged. In everyday U.S. usage, however, "grocery store" is a synonym for supermarket, a ...

s * Retail marketplaces:

public markets A marketplace or market place is a location where people regularly gather for the purchase and sale of provisions, livestock, and other goods. In different parts of the world, a marketplace may be described as a '' souk'' (from the Arabic), ' ...

market square The market square (or sometimes, the market place) is a Town square, square meant for trading, in which a market is held. It is an important feature of many towns and cities around the world.Main Streets,

High Street High Street is a common street name for the primary business street of a city, town, or village, especially in the United Kingdom and Commonwealth. It implies that it is the focal point for business, especially shopping. It is also a metonym fo ...

bazaar A bazaar () or souk (; also transliterated as souq) is a marketplace consisting of multiple small Market stall, stalls or shops, especially in the Middle East, the Balkans, North Africa and India. However, temporary open markets elsewhere, suc ...

s, souqs,

night market Night markets or night bazaars are street markets which operate at night and are generally dedicated to more leisurely strolling, shopping, and eating than more businesslike day markets. They are typically open-air markets popular in East Asia, Sou ...

s, shopping

strip mall A strip mall, strip center or strip plaza is a type of shopping center common in North America where the stores are arranged in a row, with a sidewalk in front. Strip malls are typically developed as a unit and have large parking lots in front. ...

s and

shopping mall A shopping mall (or simply mall) is a North American term for a large indoor shopping center, usually anchored by department stores. The term "mall" originally meant a pedestrian promenade with shops along it (that is, the term was used to refe ...

s *

Big-box store A big-box store (also hyperstore, supercenter, superstore, or megastore) is a physically large retail establishment, usually part of a chain of stores. The term sometimes also refers, by extension, to the company that operates the store. The t ...

supermarket A supermarket is a self-service Retail#Types of outlets, shop offering a wide variety of food, Drink, beverages and Household goods, household products, organized into sections. This kind of store is larger and has a wider selection than earli ...

hypermarket A hypermarket (sometimes called a hyperstore, supercentre or superstore) is a big-box store combining a supermarket and a department store. The result is an expansive retail facility carrying a wide range of products under one roof, including ...

s and

discount store A discount store or discounter offers a retail format in which products are sold at prices that are in principle lower than an actual or supposed "full retail price". Discounters rely on bulk purchasing and efficient distribution to keep down cost ...

s * ''Ad hoc''

markets: process of buying and selling goods or services by offering them up for bid, taking bids and then selling the item to the highest bidder * Used goods markets such as

flea market A flea market (or swap meet) is a type of street market that provides space for vendors to sell previously-owned (second-hand) goods. This type of market is often seasonal. However, in recent years there has been the development of 'formal' ...

s * Temporary markets such as

fair A fair (archaic: faire or fayre) is a gathering of people for a variety of entertainment or commercial activities. Fairs are typically temporary with scheduled times lasting from an afternoon to several weeks. Types Variations of fairs incl ...

s *

Real estate market Real estate business is the profession of buying, selling, or renting real estate (land, buildings, or housing)."Real estate": Oxford English Dictionary online: Retrieved September 18, 2011 Sales and marketing It is common practice for an intermed ...

Physical business markets

Microcosm of London Plate 033 - Corn Exchange

* Physical

s: sale of goods or merchandise to retailers; to industrial, commercial, institutional, or other professional business users or to other wholesalers and related subordinated services * Markets for

intermediate good Intermediate goods, producer goods or semi-finished products are goods, such as partly finished goods, used as inputs in the production of other goods including final goods. A firm may make and then use intermediate goods, or make and then sell, o ...

s used in production of other goods and services * Labour markets: where people sell their labour to businesses in exchange for a

wage A wage is payment made by an employer to an employee for work done in a specific period of time. Some examples of wage payments include compensatory payments such as ''minimum wage'', ''prevailing wage'', and ''yearly bonuses,'' and remuner ...

Online auctions An online auction (also electronic auction, e-auction, virtual auction, or eAuction) is an auction held over the internet and accessed by internet connected devices. Similar to in-person auctions, online auctions come in a variety of types, with d ...

and ''Ad hoc''

markets: process of buying and selling goods or services by offering them up for bid, taking bids and then selling the item to the highest bidder * Temporary markets such as

trade fair A trade fair, also known as trade show, trade exhibition, or trade exposition, is an exhibition organized so that companies in a specific industry can showcase and demonstrate their latest products and services, meet with industry partners and c ...

s *

Energy market Energy markets are national and international regulated markets that deal specifically with the trade and supply of energy. Energy market may refer to an electricity market, but can also refer to other sources of energy. Typically energy developm ...

Non-physical markets

Media market A media market, broadcast market, media region, designated market area (DMA), television market area, or simply market is a region where the population can receive the same (or similar) television and radio station offerings, and may also incl ...

s (broadcast market): is a region where the population can receive the same (or similar) television and radio station offerings and may also include other types of media including newspapers and Internet content * Internet markets (

electronic commerce E-commerce (electronic commerce) is the activity of electronically buying or selling of products on online services or over the Internet. E-commerce draws on technologies such as mobile commerce, electronic funds transfer, supply chain manageme ...

): trading in products or services using computer networks, such as the Internet * Artificial markets created by regulation to exchange rights for derivatives that have been designed to ameliorate

externalities In economics, an externality or external cost is an indirect cost or benefit to an uninvolved third party that arises as an effect of another party's (or parties') activity. Externalities can be considered as unpriced goods involved in either co ...

, such as pollution permits (see

carbon trading Emission trading (ETS) for carbon dioxide (CO2) and other greenhouse gases (GHG) is a form of carbon pricing; also known as cap and trade (CAT) or carbon pricing. It is an approach to limit climate change by creating a market with limited ...

)

Financial markets

Financial market A financial market is a market in which people trade financial securities and derivatives at low transaction costs. Some of the securities include stocks and bonds, raw materials and precious metals, which are known in the financial markets ...

s facilitate the exchange of

liquid asset Liquid capital or fluid capital is the part of a firm's assets that it holds as money. It includes cash balances, bank deposits, and money market investments. Since these assets provide little or no income to the firm, it will ordinarily seek to in ...

s. Most investors prefer investing in two markets: * The

stock market A stock market, equity market, or share market is the aggregation of buyers and sellers of stocks (also called shares), which represent ownership claims on businesses; these may include ''securities'' listed on a public stock exchange, as ...

s, for the exchange of shares in

corporation A corporation is an organization—usually a group of people or a company—authorized by the state to act as a single entity (a legal entity recognized by private and public law "born out of statute"; a legal person in legal context) and r ...

s (

NYSE The New York Stock Exchange (NYSE, nicknamed "The Big Board") is an American stock exchange in the Financial District, Manhattan, Financial District of Lower Manhattan in New York City. It is by far the List of stock exchanges, world's largest s ...

, AMEX and the

NASDAQ The Nasdaq Stock Market () (National Association of Securities Dealers Automated Quotations Stock Market) is an American stock exchange based in New York City. It is the most active stock trading venue in the US by volume, and ranked second ...

are the most common stock markets in the United States) * The

bond market The bond market (also debt market or credit market) is a financial market where participants can issue new debt, known as the primary market, or buy and sell debt securities, known as the secondary market. This is usually in the form of bonds, b ...

s There are also: *

Currency market The foreign exchange market (Forex, FX, or currency market) is a global decentralized or over-the-counter (OTC) market for the trading of currencies. This market determines foreign exchange rates for every currency. It includes all aspec ...

s are used to trade one currency for another, and are often used for speculation on currency exchange rates * The

money market The money market is a component of the economy that provides short-term funds. The money market deals in short-term loans, generally for a period of a year or less. As short-term securities became a commodity, the money market became a compon ...

is the name for the global market for lending and borrowing *

Futures market A futures exchange or futures market is a central financial exchange where people can trade standardized futures contracts defined by the exchange. Futures contracts are derivatives contracts to buy or sell specific quantities of a commodity or fi ...

s, where contracts are exchanged regarding the future delivery of goods are often an outgrowth of general

commodity market A commodity market is a market that trades in the primary economic sector rather than manufactured products, such as cocoa, fruit and sugar. Hard commodities are mined, such as gold and oil. Futures contracts are the oldest way of investin ...

s *

Prediction market Prediction markets (also known as betting markets, information markets, decision markets, idea futures or event derivatives) are open markets where specific outcomes can be predicted using financial incentives. Essentially, they are exchange-trad ...

s are a type of speculative market in which the goods exchanged are futures on the occurrence of certain events; they apply the market dynamics to facilitate information aggregation *

Insurance Insurance is a means of protection from financial loss in which, in exchange for a fee, a party agrees to compensate another party in the event of a certain loss, damage, or injury. It is a form of risk management, primarily used to hedge ...

markets *

Debt market The bond market (also debt market or credit market) is a financial market where participants can issue new debt, known as the primary market, or buy and sell debt securities, known as the secondary market. This is usually in the form of bonds, b ...

Unauthorized and illegal markets

Grey market A grey market or dark market (sometimes confused with the similar term " parallel market") is the trade of a commodity through distribution channels that are not authorized by the original manufacturer or trade mark proprietor. Grey market pr ...

s (parallel markets): is the trade of a commodity through distribution channels which, while legal, are unofficial, unauthorized, or unintended by the original manufacturer * markets in illegal goods such as the market for

illicit drugs The prohibition of drugs through sumptuary legislation or religious law is a common means of attempting to prevent the recreational use of certain intoxicating substances. While some drugs are illegal to possess, many governments regulate the ...

, illegal arms, infringing products, cigarettes sold to minors or untaxed cigarettes (in some jurisdictions), or the private sale of un

pasteurized Pasteurization American and British English spelling differences#-ise, -ize (-isation, -ization), or pasteurisation is a process of food preservation in which packaged and non-packaged foods (such as milk and fruit juices) are treated with mi ...

goat milk Goat milk is the milk of domestic goats. Goats produce about 2% of the world's total annual milk supply. Some goats are bred specifically for milk. Goat milk naturally has small, well-emulsified fat globules, which means the cream will stay in ...

Mechanisms

In economics, a market that runs under

laissez-faire ''Laissez-faire'' ( ; from french: laissez faire , ) is an economic system in which transactions between private groups of people are free from any form of economic interventionism (such as subsidies) deriving from special interest groups. ...

policies is called a

, it is "free" from the government, in the sense that the government makes no attempt to intervene through

tax A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer (an individual or legal entity) by a governmental organization in order to fund government spending and various public expenditures (regional, local, or n ...

es,

subsidies A subsidy or government incentive is a form of financial aid or support extended to an economic sector (business, or individual) generally with the aim of promoting economic and social policy. Although commonly extended from the government, the ter ...

s and so on. However, market prices may be distorted by a seller or sellers with

monopoly A monopoly (from Greek language, Greek el, μόνος, mónos, single, alone, label=none and el, πωλεῖν, pōleîn, to sell, label=none), as described by Irving Fisher, is a market with the "absence of competition", creating a situati ...

power, or a buyer with

monopsony In economics, a monopsony is a market structure in which a single buyer substantially controls the market as the major purchaser of goods and services offered by many would-be sellers. The microeconomic theory of monopsony assumes a single entity ...

power. Such price distortions can have an adverse effect on market participant's welfare and reduce the

efficiency Efficiency is the often measurable ability to avoid wasting materials, energy, efforts, money, and time in doing something or in producing a desired result. In a more general sense, it is the ability to do things well, successfully, and without ...

of market outcomes. The relative level of organization and negotiating power of buyers and sellers also markedly affects the functioning of the market. Markets are a

and systems have

structure A structure is an arrangement and organization of interrelated elements in a material object or system, or the object or system so organized. Material structures include man-made objects such as buildings and machines and natural objects such as ...

. The

of a well-functioning market is defined by the theory of

perfect competition In economics, specifically general equilibrium theory, a perfect market, also known as an atomistic market, is defined by several idealizing conditions, collectively called perfect competition, or atomistic competition. In Economic model, theoret ...

. Well-functioning markets of the real world are never perfect, but basic structural characteristics can be approximated for real world markets, for example: * Many small buyers and sellers * Buyers and sellers have equal access to information * Products are comparable Markets where price negotiations meet equilibrium, but the equilibrium is not efficient are said to experience

. Market failures are often associated with

time-inconsistent preferences In economics, dynamic inconsistency or time inconsistency is a situation in which a decision-maker's preferences change over time in such a way that a preference can become inconsistent at another point in time. This can be thought of as there be ...

information asymmetries In contract theory and economics, information asymmetry deals with the study of decisions in transactions where one party has more or better information than the other. Information asymmetry creates an imbalance of power in transactions, which ca ...

, non-perfectly competitive markets,

principal–agent problem The principal–agent problem refers to the conflict in interests and priorities that arises when one person or entity (the "agent") takes actions on behalf of another person or entity (the " principal"). The problem worsens when there is a gre ...

, or

public goods In economics, a public good (also referred to as a social good or collective good)Oakland, W. H. (1987). Theory of public goods. In Handbook of public economics (Vol. 2, pp. 485-535). Elsevier. is a good that is both non-excludable and non-riva ...

. Among the major negative externalities which can occur as a side effect of production and market exchange, are

air pollution Air pollution is the contamination of air due to the presence of substances in the atmosphere that are harmful to the health of humans and other living beings, or cause damage to the climate or to materials. There are many different types ...

(side-effect of

manufacturing Manufacturing is the creation or production of goods with the help of equipment, labor, machines, tools, and chemical or biological processing or formulation. It is the essence of secondary sector of the economy. The term may refer to a r ...

and

logistics Logistics is generally the detailed organization and implementation of a complex operation. In a general business sense, logistics manages the flow of goods between the point of origin and the point of consumption to meet the requirements of ...

) and

environmental degradation Environmental degradation is the deterioration of the environment (biophysical), environment through depletion of resources such as quality of air, water and soil; the destruction of ecosystems; habitat destruction; the extinction of wildlife; an ...

(side-effect of

farm A farm (also called an agricultural holding) is an area of land that is devoted primarily to agricultural processes with the primary objective of producing food and other crops; it is the basic facility in food production. The name is used fo ...

ing and

urbanization Urbanization (or urbanisation) refers to the population shift from rural to urban areas, the corresponding decrease in the proportion of people living in rural areas, and the ways in which societies adapt to this change. It is predominantly t ...

). There exists a popular thought, especially among

economist An economist is a professional and practitioner in the social sciences, social science discipline of economics. The individual may also study, develop, and apply theories and concepts from economics and write about economic policy. Within this ...

s, that free markets would have a structure of a

. The logic behind this thought is that market failure is thought to be caused by other

exogenic In a variety of contexts, exogeny or exogeneity () is the fact of an action or object originating externally. It contrasts with endogeneity or endogeny, the fact of being influenced within a system. Economics In an economic model, an exogeno ...

systems, and after removing those exogenic systems ("freeing" the markets) the free markets could run without market failures. For a market to be competitive, there must be more than a single buyer or seller. It has been suggested that two people may trade, but it takes at least three persons to have a market so that there is competition in at least one of its two sides. However, competitive markets—as understood in formal economic theory—rely on much larger numbers of both buyers and sellers. A market with a single seller and multiple buyers is a

. A market with a single buyer and multiple sellers is a

. These are "the polar opposites of perfect competition". As an argument against such logic, there is a second view that suggests that the source of market failures is inside the market system itself, therefore the removal of other interfering systems would not result in markets with a structure of perfect competition. As an analogy, such an argument may suggest that capitalists do not want to enhance the structure of markets, just like a

coach Coach may refer to: Guidance/instruction * Coach (sport), a director of athletes' training and activities * Coaching, the practice of guiding an individual through a process ** Acting coach, a teacher who trains performers Transportation * Co ...

of a football team would influence the

referee A referee is an official, in a variety of sports and competition, responsible for enforcing the rules of the sport, including sportsmanship decisions such as ejection. The official tasked with this job may be known by a variety of other titl ...

s or would break the

rules Rule or ruling may refer to: Education * Royal University of Law and Economics (RULE), a university in Cambodia Human activity * The exercise of political or personal control by someone with authority or power * Business rule, a rule perta ...

if he could while he is pursuing his target of winning the game. Thus, according to this view, capitalists are not enhancing the balance of their team versus the team of

consumer A consumer is a person or a group who intends to order, or uses purchased goods, products, or services primarily for personal, social, family, household and similar needs, who is not directly related to entrepreneurial or business activities. T ...

workers The workforce or labour force is a concept referring to the pool of human beings either in employment or in unemployment. It is generally used to describe those working for a single company or industry, but can also apply to a geographic regio ...

, so the market system needs a "referee" from outside that balances the game. In this second framework, the role of a "referee" of the market system is usually to be given to a democratic government.

Research

Disciplines such as

sociology Sociology is a social science that focuses on society, human social behavior, patterns of Interpersonal ties, social relationships, social interaction, and aspects of culture associated with everyday life. It uses various methods of Empirical ...

economic history Economic history is the academic learning of economies or economic events of the past. Research is conducted using a combination of historical methods, statistical methods and the application of economic theory to historical situations and ins ...

economic geography Economic geography is the subfield of human geography which studies economic activity and factors affecting them. It can also be considered a subfield or method in economics. There are four branches of economic geography. There is, primary secto ...

and

marketing Marketing is the process of exploring, creating, and delivering value to meet the needs of a target market in terms of goods and services; potentially including selection of a target audience; selection of certain attributes or themes to emph ...

developed novel understandings of markets studying actual existing markets made up of persons interacting in diverse ways in contrast to an abstract and all-encompassing concepts of "the market". The term "the market" is generally used in two ways: # "The market" denotes the abstract mechanisms whereby supply and demand confront each other and deals are made; in its place, reference to markets reflects ordinary experience and the places, processes and institutions in which exchanges occurs # "The market" signifies an integrated, all-encompassing and cohesive capitalist world economy.

Economics

Political economy

Economics used to be called

political economy Political economy is the study of how Macroeconomics, economic systems (e.g. Marketplace, markets and Economy, national economies) and Politics, political systems (e.g. law, Institution, institutions, government) are linked. Widely studied ph ...

, as

Adam Smith Adam Smith (baptized 1723 – 17 July 1790) was a Scottish economist and philosopher who was a pioneer in the thinking of political economy and key figure during the Scottish Enlightenment. Seen by some as "The Father of Economics"——— ...

defined it in

The Wealth of Nations ''An Inquiry into the Nature and Causes of the Wealth of Nations'', generally referred to by its shortened title ''The Wealth of Nations'', is the ''magnum opus'' of the Scottish economist and moral philosopher Adam Smith. First published in 1 ...

The earliest works of political economy are usually attributed to the British scholars Adam Smith,

Thomas Malthus Thomas Robert Malthus (; 13/14 February 1766 – 29 December 1834) was an English cleric, scholar and influential economist in the fields of political economy and demography. In his 1798 book '' An Essay on the Principle of Population'', Mal ...

, and

David Ricardo David Ricardo (18 April 1772 – 11 September 1823) was a British Political economy, political economist. He was one of the most influential of the Classical economics, classical economists along with Thomas Robert Malthus, Thomas Malthus, Ad ...

, although they were preceded by the work of the French physiocrats, such as

François Quesnay François Quesnay (; 4 June 1694 – 16 December 1774) was a French economist and physician of the Physiocratic school. He is known for publishing the "Tableau économique" (Economic Table) in 1758, which provided the foundations of the ideas of ...

(1694–1774) and

Anne-Robert-Jacques Turgot Anne Robert Jacques Turgot, Baron de l'Aulne ( ; ; 10 May 172718 March 1781), commonly known as Turgot, was a French economist and statesman. Originally considered a physiocrat, he is today best remembered as an early advocate for economic libe ...

(1727–1781). Smith describes how exchange of goods arose: Peru - in the market (8444386334)

And explains how exchanged mediated by money came to dominate the market:

Microeconomics

Microeconomics Microeconomics is a branch of mainstream economics that studies the behavior of individuals and firms in making decisions regarding the allocation of scarce resources and the interactions among these individuals and firms. Microeconomics fo ...

(from Greek prefix ''mikro''- meaning "small" and economics) is a branch of economics that studies the behavior of individuals and small impacting organizations in making decisions on the allocation of limited resources (see

scarcity In economics, scarcity "refers to the basic fact of life that there exists only a finite amount of human and nonhuman resources which the best technical knowledge is capable of using to produce only limited maximum amounts of each economic good. ...

). On the other hand, macroeconomics (from the Greek prefix ''makro''- meaning "large" and economics) is a branch of economics dealing with the performance, structure, behavior and decision-making of an economy as a whole, rather than individual markets.

=Marginal revolution

Afghan market teeming with vendors and shoppers 2-4-09

The modern field of microeconomics arose as an effort of neoclassical economics school of thought to put economic ideas into mathematical mode. It began in the 19th century debates surrounding the works of

Antoine Augustin Cournot Antoine Augustin Cournot (; 28 August 180131 March 1877) was a French philosopher and mathematician who also contributed to the development of economics. Biography Antoine Augustin Cournot was born at Gray, Haute-Saône. In 1821 he entered o ...

William Stanley Jevons William Stanley Jevons (; 1 September 183513 August 1882) was an English economist and logician. Irving Fisher described Jevons's book ''A General Mathematical Theory of Political Economy'' (1862) as the start of the mathematical method in ec ...

Carl Menger Carl Menger von Wolfensgrün (; ; 28 February 1840 – 26 February 1921) was an Austrian economist and the founder of the Austrian School of economics. Menger contributed to the development of the theories of marginalism and marginal utility ...

and

Léon Walras Marie-Esprit-Léon Walras (; 16 December 1834 – 5 January 1910) was a French mathematical economist and Georgist. He formulated the marginal theory of value (independently of William Stanley Jevons and Carl Menger) and pioneered the developmen ...

—this period is usually denominated as the Marginal Revolution. A recurring theme of these debates was the contrast between the

labor theory of value The labor theory of value (LTV) is a theory of value that argues that the economic value of a good or service is determined by the total amount of " socially necessary labor" required to produce it. The LTV is usually associated with Marxian e ...

and the

subjective theory of value The subjective theory of value is an economic theory which proposes the idea that the value of any good is not determined by the utility value of the object, nor by the cumulative value of components or labour needed to produce or manufacture it, ...

, the former being associated with classical economists such as

and

Karl Marx Karl Heinrich Marx (; 5 May 1818 – 14 March 1883) was a German philosopher, economist, historian, sociologist, political theorist, journalist, critic of political economy, and socialist revolutionary. His best-known titles are the 1848 ...

(Marx was a contemporary of the marginalists). A labour theory of value can be understood as a theory that argues that economic value is determined by the amount of socially necessary labour time while a subjective theory of value derives economic value from subjective preferences, usually by specifying a

utility function As a topic of economics, utility is used to model worth or value. Its usage has evolved significantly over time. The term was introduced initially as a measure of pleasure or happiness as part of the theory of utilitarianism by moral philosopher ...

in accordance with utilitarian philosophy. In his '' Principles of Economics'' (1890),A. Marshall, ''Principles of Economics'', 1890

Alfred Marshall Alfred Marshall (26 July 1842 – 13 July 1924) was an English economist, and was one of the most influential economists of his time. His book '' Principles of Economics'' (1890) was the dominant economic textbook in England for many years. I ...

presented a possible solution to this problem, using the

model. Marshall's idea of solving the controversy was that the

demand curve In economics, a demand curve is a graph depicting the relationship between the price of a certain commodity (the ''y''-axis) and the quantity of that commodity that is demanded at that price (the ''x''-axis). Demand curves can be used either for ...

could be derived by aggregating individual consumer demand curves, which were themselves based on the consumer problem of maximizing

utility As a topic of economics, utility is used to model worth or value. Its usage has evolved significantly over time. The term was introduced initially as a measure of pleasure or happiness as part of the theory of utilitarianism by moral philosopher ...

. The

supply curve In economics, supply is the amount of a resource that firms, producers, labourers, providers of financial assets, or other economic agents are willing and able to provide to the marketplace or to an individual. Supply can be in produced goods, la ...

could be derived by superimposing a representative firm supply curves for the

factors of production In economics, factors of production, resources, or inputs are what is used in the production process to produce output—that is, goods and services. The utilized amounts of the various inputs determine the quantity of output according to the relat ...

and then

(economic equivalent of

mechanical equilibrium In classical mechanics, a particle is in mechanical equilibrium if the net force on that particle is zero. By extension, a physical system made up of many parts is in mechanical equilibrium if the net force on each of its individual parts is zero ...

) would be given by the intersection of demand and supply curves. He also introduced the notion of different market periods: mainly

long run and short run In economics, the long-run is a theoretical concept in which all markets are in equilibrium, and all prices and quantities have fully adjusted and are in equilibrium. The long-run contrasts with the short-run, in which there are some constraints an ...

. This set of ideas gave way to what economists call

—now found in the standard microeconomics texts, even though Marshall himself was highly skeptical it could be used as general model of all markets.

=Market structure

Opposed to the model of perfect competition, some models of

imperfect competition In economics, imperfect competition refers to a situation where the characteristics of an economic market do not fulfil all the necessary conditions of a perfectly competitive market. Imperfect competition will cause market inefficiency when it hap ...

were proposed: * The

model, already considered by marginalist economists, describes a profit maximizing capitalist facing a market

with no competitors, who may practice

price discrimination Price discrimination is a microeconomic pricing strategy where identical or largely similar goods or services are sold at different prices by the same provider in different markets. Price discrimination is distinguished from product different ...

. * Oligopoly is a

market form Market structure, in economics, depicts how firms are differentiated and categorised based on the types of goods they sell (homogeneous/heterogeneous) and how their operations are affected by external factors and elements. Market structure makes it ...

in which a market or industry is dominated by a small number of sellers. The oldest model was the spring water

duopoly A duopoly (from Greek δύο, ''duo'' "two" and πωλεῖν, ''polein'' "to sell") is a type of oligopoly where two firms have dominant or exclusive control over a market. It is the most commonly studied form of oligopoly due to its simplicit ...

of Cournot (1838) in which equilibrium is determined by the duopolists reactions functions. It was criticized by

Harold Hotelling Harold Hotelling (; September 29, 1895 – December 26, 1973) was an American mathematical statistician and an influential economic theorist, known for Hotelling's law, Hotelling's lemma, and Hotelling's rule in economics, as well as Hotelling's T ...

for its instability, by

Joseph Bertrand Joseph Louis François Bertrand (; 11 March 1822 – 5 April 1900) was a French mathematician who worked in the fields of number theory, differential geometry, probability theory, economics and thermodynamics. Biography Joseph Bertrand was the ...

for lacking equilibrium for prices as independent variables. *

Monopolistic competition Monopolistic competition is a type of imperfect competition such that there are many producers competing against each other, but selling products that are differentiated from one another (e.g. by branding or quality) and hence are not perfect ...

is a type of imperfect competition such that many producers sell products that are differentiated from one another (e.g., by branding or quality) and hence are not perfect substitutes. In monopolistic competition, a firm takes the prices charged by its rivals as given and ignores the impact of its own prices on the prices of other firms. The "founding father" of the theory of monopolistic competition is

Edward Hastings Chamberlin Edward Hastings Chamberlin (May 18, 1899 – July 16, 1967) was an American economist. He was born in La Conner, Washington, and died in Cambridge, Massachusetts. Chamberlin studied first at the University of Iowa (where he was influenced by Fr ...

, who wrote a pioneering book on the subject, ''Theory of Monopolistic Competition'' (1933).

Joan Robinson Joan Violet Robinson (''née'' Maurice; 31 October 1903 – 5 August 1983) was a British economist well known for her wide-ranging contributions to economic theory. She was a central figure in what became known as post-Keynesian economics. B ...

published a book called ''The Economics of Imperfect Competition'' with a comparable theme of distinguishing perfect from imperfect competition. Chamberlin defined monopolistic competition as "challenge to traditional viewpoint of economics that competition and monopoly are alternatives and that individual prices are to be explained in terms of one or the other". He continues: "By contrast it is held that most economic situations are composite of both competition and monopoly, and that, wherever this is the case, a false view is given by neglecting either one of the two forces and regarding the situation as made up entirely of the other". Hotelling built a model of market located over a line with two sellers in each extreme of the line, in this case maximizing profit for both sellers leads to a stable equilibrium. From this model also follows that if a seller is to choose the location of his store so as to maximize his profit, he will place his store the closest to his competitor as "the sharper competition with his rival is offset by the greater number of buyers he has an advantage". He also argues that clustering of stores is wasteful from the point of view of transportation costs and that public interest would dictate more spatial dispersion. *

William Baumol William Jack Baumol (February 26, 1922 – May 4, 2017) was an American economist. He was a professor of economics at New York University, Academic Director of the Berkley Center for Entrepreneurship and Innovation, and Professor Emeritus at Prin ...

provided in his 1977 paper the current formal definition of a

natural monopoly A natural monopoly is a monopoly in an industry in which high infrastructural costs and other barriers to entry relative to the size of the market give the largest supplier in an industry, often the first supplier in a market, an overwhelming adv ...

where “an industry in which multifirm production is more costly than production by a monopoly”. * Baumol defined a

contestable market In economics, the theory of contestable markets, associated primarily with its 1982 proponent William J. Baumol, held that there are markets served by a small number of firms that are nevertheless characterized by competitive equilibrium (and ther ...

in his 1982 paper as a market where "entry is absolutely free and exit absolutely costless", freedom of entry in

Stigler Stigler is a surname. Notable people with the surname include: * Franz Stigler (1915–2008), Luftwaffe pilot who escorted an American bomber back to safety in 1943 * George Stigler (1911–1991), Nobel Prize–winning U.S. economist, associated wi ...

sense: the incumbent has no cost discrimination against entrants. He states that a contestable market will never have an economic profit greater than zero when in equilibrium and the equilibrium will also be efficient. According to Baumol, this equilibrium emerges endogenously due to the nature of contestable markets; that is, the only industry structure that survives in the long run is the one which minimizes total costs. This is in contrast to the older theory of industry structure since not only is industry structure not

exogenously In a variety of contexts, exogeny or exogeneity () is the fact of an action or object originating externally. It contrasts with endogeneity or endogeny, the fact of being influenced within a system. Economics In an economic model, an exogeno ...

given, but equilibrium is reached without an ad hoc hypothesis on the behavior of firms, say using reaction functions in a duopoly. He concludes the paper commenting that regulators that seek to impede entry and/or exit of firms would do better to not interfere if the market in question resembles a contestable market.

=Market failure

Around the 1970s the study of

s came into focus with the study of

information asymmetry In contract theory and economics, information asymmetry deals with the study of decisions in transactions where one party has more or better information than the other. Information asymmetry creates an imbalance of power in transactions, which ca ...

. In particular, three authors emerged from this period: Akerlof, Spence and Stiglitz.

Akerlof George Arthur Akerlof (born June 17, 1940) is an American economist and a university professor at the McCourt School of Public Policy at Georgetown University and Koshland Professor of Economics Emeritus at the University of California, Berkeley. ...

considered the problem of bad quality cars driving good quality cars out of the market in his classic "

The Market for Lemons ''The Market for Lemons: Quality Uncertainty and the Market Mechanism'' is a widely-cited 1970 paper by economist George Akerlof which examines how the quality of goods traded in a market can degrade in the presence of information asymmetry betwe ...

" (1970) because of the presence of asymmetrical information between buyers and sellers.

Michael Spence Andrew Michael Spence (born November 7, 1943) is a Canadian-American economist and Nobel laureate. Spence is the William R. Berkley Professor in Economics and Business at the Stern School of Business at New York University, and the Philip H. Kn ...

explained that signaling was fundamental in the labour market since employers can't know beforehand which candidate is the most productive, a college degree becomes a signaling device that a firm uses to select new personnel.

Stiglitz Joseph Eugene Stiglitz (; born February 9, 1943) is an American New Keynesian economist, a public policy analyst, and a full professor at Columbia University. He is a recipient of the Nobel Memorial Prize in Economic Sciences (2001) and the Joh ...

provided some general conditions under which market equilibrium is not efficient: presence of

, imperfect information and

incomplete market In economics, incomplete markets are markets in which there does not exist an Arrow–Debreu security for every possible state of nature. In contrast with complete markets, this shortage of securities will likely restrict individuals from transfer ...

=State interference

C. B. Macpherson Crawford Brough Macpherson (1911–1987) was an influential Canadian political scientist who taught political theory at the University of Toronto. Life Macpherson was born on 18 November 1911 in Toronto, Ontario. After graduating from the Univ ...

identifies an underlying model of the market underlying Anglo-American liberal democratic political economy and philosophy in the seventeenth and eighteenth centuries: persons are cast as self-interested individuals, who enter into contractual relations with other such individuals, concerning the exchange of goods or personal capacities cast as commodities, with the motive of maximizing

pecuniary {{Short pages monitor