6 The market system

Chris Britton

As part of their normal production activity, businesses are involved in buying (inputs – such as labour
and raw materials) and selling (outputs – the finished product). Buying and selling take place in markets
and although there are many different types of market, the basic analysis remains the same.

Learning outcomes

Having read this chapter you should be able to:

● explain the working of the market system ● apply the theory to the real world ● demonstrate the
importance of key concepts such as elasticity to business ● discuss the wider economic effects of
changes in market forces

Key terms

Buyers’ market Complements Cross-price elasticity Demand

Demand curve Effective demand Effective supply Elasticity

Elasticity of demand Elasticity of supply Equilibrium price

Equilibrium quantity Excess demand Excess supply Factor market Free market Income elasticity
Inelasticity Inferior goods Law of demand Law of supply Market

Market system Normal goods Price ceiling Price controls Price elasticity Price floor Product market
Sellers’ market Substitutes Supply Supply curve

Introduction

The market system is an economy in which all of the basic economic choices are made through the
market. The market is a place where buyers and sellers of a product are brought together. The nature
and location of the market depends on the product. For example, within your local town there is likely
to be a vegetable market where you would go to buy vegetables. Here, buyers and sellers meet face to
face in the same location, but this is not always the case. The market for used cars might be the local
newspaper classified section; the sale of stocks and shares passes through a broker so that the buyer
never meets the seller. There are many different types of market, involving different buyers and sellers.
Firms sell the goods and services they produce to households on the product markets, while in the
factor markets firms are buying resources such as labour and raw materials. The discussion in this
chapter will concentrate on the product markets, but much of the analysis could also be applied to the
factor markets

A free market system is one in which the basic economic choices are made through the market,
without any intervention by the government. In reality, markets are not completely free; governments
intervene in markets for many reasons and in many different ways, but in this chapter such
intervention will be ignored.