Chapter 2.2 – Introducing the Market System
Defining a Market System
A market system is a way to match buyers and sellers.
In this chapter, you will learn to
- Identify the characteristics of a market system
Key Takeaways
Key Points
- Publishing current prices is a key component with a market system.
- Competition is the primary regulatory mechanism in a market system.
- Economists recognize a number of different structures of market systems based on characteristics such as the level of competition.
Key Terms
- price: The quantity of payment or compensation given by one party to another in return for goods or services.
In an economy, a market system is any systematic process that enables many market players to bid and ask. In other words, a market system is a place (virtual or physical) that facilitates the matching of buyers and sellers. Many markets exist, and each can be defined based on a number of characteristics, such as what is being exchanged in the market, the regulations, who is allowed to participate, and how transactions occur. One defining component of markets is the medium of exchange or the price. In most American markets, the medium of exchange is dollars. Both buyers and sellers look at the price to determine whether or not they want to trade. A seller has a certain minimum price at which s/he is willing to sell, though s/he would happily accept more. Likewise, a buyer has a certain maximum price at which s/he is willing to buy, though s/he would happily pay less. If the minimum the seller would accept is less than the maximum a buyer would pay, a transaction can occur. Markets help such buyers and sellers meet to trade.
In market systems, prices are discoverable; both buyers and sellers are capable of finding out the current price at which a transaction could occur. Publishing current prices is a key component with a market system. The chosen prices impact the immediate group of buyers and sellers, but also may impact long term supply and demand decisions within the market.
There are many examples of market systems. Perhaps the most famous is the stock market in which buyers and sellers trade stocks. The prices at which those sales occur is recorded and is the basis for the stock price you may have seen in the newspaper or on TV. There are markets for many types of products other than stocks: the global oil market, your local farmers’ market, and eBay are all forms of markets with their own defining characteristics.
Gains from Markets
Gains in a market are referred to as total welfare or economic surplus.
Learning Objectives
Explain how to calculate total welfare
Key Takeaways
Key Points
- Within total welfare, economists look at consumer surplus and producer surplus.
- Consumer surplus is the monetary gain that consumers receive when they purchase a good for less than the highest price they are willing to pay.
- Producer surplus is the amount that producers benefit by selling a good at a market price that is higher than the lea