Lesson 1, Topic 1
In Progress

1.2 Analyse the viability of a selected idea/opportunity against specific screening variables.

ryanrori December 22, 2020

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What is the Market?

In a free market economy prices are determined by the interaction of supply and demand. Eggs or toothpaste, appendectomies or massages, bonds or stocks, or even money itself – the prices of these goods and services are established in a market through the forces of supply and demand.

A Market is an organised interaction between buyers and sellers that enables them to engage in trade.

Demand for a product is the set of quantities that buyers wish to purchase at various possible prices. At any particular moment we expect that the lower the price, the greater the quantity that will be demanded.

Supply for a product is the set of quantities that sellers wish to offer at various possible prices. At any particular moment, we expect that the higher the price, the greater the quantity that will be supplied.

Supply and Demand Analysis brings together information concerning the supply and the demand of goods in the context of a market. Economists use this analysis to determine the equilibrium price of a product and the quantity that will be bought and sold.

A market is an organised interaction of buyers and sellers that enables them to trade or exchange. To the buyer it is the place or means through which he can buy. To the seller it is the place or means through which he can sell.

Markets can vary significantly. There are markets for tangible goods or commodities like bananas or shoes, markets for services like massages or medical attention, and there are markets for services or service providers like construction workers or farm land. There are international markets like the world market for rare coins and local markets like the market for cleaning services in Butterworth. There are continuous markets such as the market for movie viewing in Rosebank and limited-time markets such as the market for bank services on public holidays. There are markets where the transactions between buyers and sellers are face to face, as in retail purchases of groceries or clothing, and there are markets like the Johannesburg Stock Exchange where buyers and sellers of securities transact through a network of middlemen (called brokers) without even knowing of each other’s existence. There are markets that involve very well-defined and nearly homogeneous products, such as twelve-pill containers of Bayer aspirin, and there are markets for heterogeneous factor inputs like unskilled labour.

The Importance of Markets

We can imagine at least two sorts of economic systems that do not require markets.

First, a system where each family unit is virtually self-sufficient. In such a society, each family provides all of the goods and services that it consumes and goes without those that it does not produce.

Second, a system where a central agency determines all production and distribution. The government decides which resources (human and nonhuman) will produce what goods and services and who will ultimately consume them. Any system between these two requires markets.

Societies based on self-sufficient family units are very inefficient since they do not take advantage of the division of labour and other forms of specialisation. Specialisation requires markets in order to facilitate exchange.

Adam Smith, often considered to be the founder of modern economics, persuasively argued in The Wealth of Nations (1776) that the division of labour and specialisation make for tremendous gains in productive output. He wrote of a pin factory that he visited where ten workers performing different tasks “could make among them upwards of forty-eight thousand pins in a day. . . But if they had all [worked] separately and independently. . . they certainly could not each of them make twenty, perhaps not one pin a day. ..” But man cannot live by pins alone. These ten men required markets in order to exchange their pins (or money, if they were employed and not paid in pins) for items of food, clothing, shelter, and amusement. The workers were too busy to provide these goods for themselves, since they were occupied in making pins.

The second marketless system, a directed economy, is completely devoid of freedom. Free choice cannot be exercised because government makes all of the allocative decisions. No such extreme form of planning has ever actually existed, but some societies do depend less on markets to allocate resources and goods and services than do others.

Capitalism is often associated with markets and communism with the non market (direct) allocation of resources, although these categories must not be drawn too stringently. Some communist societies depend upon markets as much as capitalist societies do. In communist countries, however, Government is more apt to set prices in order to determine the market results. Markets are freer in capitalist countries. Buyers can usually buy and sellers can usually sell what they want, when they want and where they want. The price in a free market is determined by these buyers and sellers alone.

Markets, Money, and Prices

Markets do not require money. Goods may be exchanged directly for other goods. This is referred to as barter.

But barter has an inherent disadvantage. It requires individual A, who wishes to sell something, to find individual B who not only wants exactly what A has to sell but also wishes to sell exactly what A wants.

Money eliminates this problem by functioning as a medium of exchange. Money is a commodity that everyone wants; because everyone knows that everyone else wants it. A farmer who has corn to sell and would like a bicycle does not have to look for someone who wants to trade a bicycle for corn. Rather he sells his corn in a corn market for money and then uses the money to buy a bicycle at a bicycle shop. In this way the use of money makes for better and less cumbersome markets. A monetary price can be negotiated by buyers and sellers to enable trades to be made.

Difficulty in Identifying Actual Markets

It is easier to understand the meaning of the market concept than to identify actual markets.

For example, is there such a thing as a South African steel market? The answer is quite complicated. First, there are many different steel products, structural steel, cold rolled steel, tin plate, stainless steel, and wire, just to mention a few. Second, there exist several other materials that are more or less good substitutes for steel, depending upon its intended use. Aluminium, paper, plastic and glass containers are substitutes for tin (steel) cans, reinforced concrete is a substitute for structural steel, and aluminium is a substitute for stainless steel. Thirdly, locational differences may be important. Some structural steel products produced in the Cape compete very little with identical products from Gauteng because the bulky nature of the material makes it expensive to transport. Certain steel products from Japan and West Germany, however, sometimes compete in our markets because the price, even with transportation costs, is significantly below prices charged by SA steel producers.

Locational differences may also affect delivery time, convenience, and the cost of obtaining information, all of which are factors that influence markets. We must conclude then, that there are many steel markets, expressed in terms of particular steel products in particular geographic locations. They may be quite different from each other, yet they are not wholly independent. Also, there are many product markets in which the steel product is only one of several that compete with one another. Even though markets are difficult to identify in particular cases, the market concept is central to economic analysis.

The Perfect Market

For the purpose of your training we will overlook some of the turbulence of the real world and deal with each market as though it were a perfect market.

A perfect market is one that works well. It has three characteristics. First, all the buyers and sellers in the market have perfect knowledge of the offers that are being made to buy and to sell. Secondly, all the buyers and sellers have full mobility, the ability to move around enough to take advantage of any attractive offers that may be made. Thirdly, there is vigorous competition among sellers and buyers. This means that each seller is prepared to take customers away from other sellers, and each buyer is prepared to outbid other buyers, if this serves their own interests.

Collectively these characteristics imply that in a perfect market there is only one price prevailing at any given time.

To see this, consider the case of a large rural village where farmers and merchants meet every Saturday in the village square to sell and buy corn. Assume that in one part of the square farmers were selling, and merchants were buying, large amounts of corn for R15.00 a bag. If a farmer knew about those transactions and was able to get over to that part of the square, he would not be willing to sell his corn anywhere else in the square for less than R15.00 a bag. Likewise, a knowledgeable, mobile, and competitive merchant would not be willing to buy corn anywhere else in the square for more than R15.00 a bag. That single price of R15.00 would be the only one that could prevail at that particular time.

In the real world, most markets are not perfect. It may be difficult, and even expensive, to obtain information or to “shop around” for the best place to buy or to sell. Buyers and sellers may be unwilling, or even unable, to compete with each other. But enough markets come close enough to this ideal enough of the time that it is useful to develop a model of how markets would behave if they were operating perfectly.