Market: What It Means in Economics, Types and Common Features

Market

Investopedia / Candra Huff

What Is a Market?

A market is a place where parties can gather to facilitate the exchange of goods and services. The parties involved are usually buyers and sellers. The market may be physical like a retail outlet, where people meet face-to-face, or virtual like an online market, where there is no direct physical contact between buyers and sellers. There are some key characteristics that help define a market, including the availability of an arena, buyers and sellers, and a commodity that can be purchased and sold.

Key Takeaways

  • A market is a place where buyers and sellers can meet to facilitate the exchange or transaction of goods and services.
  • Markets can be physical like a retail outlet, or virtual like an e-retailer.
  • Other examples include illegal markets, auction markets, and financial markets.
  • Markets establish the prices of goods and services that are determined by supply and demand.
  • Features of a market include the availability of an arena, buyers and sellers, and a commodity.
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Market

Understanding Markets

A market is any place where two or more parties can meet to engage in an economic transaction—even those that don't involve legal tender. A market transaction may involve goods, services, information, currency, or any combination of these that pass from one party to another. In short, markets are arenas in which buyers and sellers can gather and interact.

Two parties are generally needed to make a trade. But, at minimum, a third party is required to introduce competition and bring balance to the market. As such, a market in a state of perfect competition, among other things, is characterized by a high number of active buyers and sellers.

Beyond this broad definition, the term market encompasses a variety of things, depending on the context. For instance, it may refer to the stock market, which is the place where securities are traded. It may also be used to describe a collection of people who wish to buy a specific product or service in a specific place, such as the Brooklyn housing market. Or it could refer to an industry or business sector, such as the global diamond market.

Certain decisions that help shape the market are determined by an economic system known as the market economy. In this system, factors like investments and the production, distribution, and pricing of goods and services are led by supply and demand from businesses and individuals. As such, a market economy is unplanned and is not part of a planned or command economy where the government dictates all of these factors. Examples of market economies include the United States, Canada, the United Kingdom, and Japan.

In the United States, the Securities and Exchange Commission (SEC) regulates the stock, bond, and currency markets. It puts provisions in place to prevent fraud while ensuring traders and investors have the right information to make the most informed decisions possible.

Supply and Demand

Whatever the context, a market establishes the prices for goods and other services. These rates are determined by supply and demand. The idea of supply and demand is one of the very basics of economics. Supply is created by the sellers, while demand is generated by buyers.

Markets try to find some balance in price when supply and demand are themselves in balance. But that balance can in itself be disrupted by factors other than price including incomes, expectations, technology, the cost of production, and the number of buyers and sellers participating.

To put it simply, the number of goods and services available is determined by what people want and how eager they are to buy. Sellers increase production when buyers demand more goods and services. Producers then increase their prices in order to realize a profit. When buyer demand decreases, companies have to drop their prices and, therefore, the number of goods and services they bring to market.

Physical and Virtual Markets

Markets may be represented by physical locations where transactions are made. These include retail stores and other similar businesses that sell individual items to wholesale markets selling goods to distributors. Or they may be virtual. Internet-based stores and auction sites such as Amazon and eBay are examples of markets where transactions can take place entirely online and the parties involved never connect physically.

Markets may emerge organically or as a means of enabling ownership rights over goods, services, and information. When on a national or other more specific regional level, markets may often be categorized as developed or developing markets. This distinction depends on many factors, including income levels and the nation or region’s openness to foreign trade.

The size of a market is determined by the number of buyers and sellers, as well as the amount of money that changes hands each year.

Types of Markets

Markets vary widely for a number of reasons, including the kinds of products sold, location, duration, size, and constituency of the customer base, size, legality, and many other factors. Aside from the two most common markets—physical and virtual—there are other kinds of markets where parties can gather to execute their transactions.

Underground Market

An underground or black market refers to an illegal market where transactions occur without the knowledge of the government or other regulatory agencies. Many illegal markets exist in order to circumvent existing tax laws. This is why many involve cash-only transactions or non-traceable forms of currency, making them harder to track.

Many illegal markets exist in countries that are economically developing and with planned or command economies where the government controls the production and distribution of goods and services. When there is a shortage of certain goods and services in the economy, members of the illegal market step in and fill the void.

Illegal markets can also exist in developed economies. These shadow markets, as they're also known, become prevalent when prices control the sale of certain products or services, especially when demand is high. Ticket scalping is one example of an illegal or shadow market. When demand for concert or theater tickets is high, scalpers will step in, buy up a bunch, and sell them at inflated prices on the underground market.

Auction Market

An auction market brings many people together for the sale and purchase of specific lots of goods. The buyers or bidders try to top each other for the purchase price. The items up for sale end up going to the highest bidder.

The most common auction markets involve livestock, foreclosed homes, and art and antiques. Many operate online now. For example, the U.S. Treasury sells its bonds, notes, and bills via regular auctions.

Financial Market

The blanket term financial market refers to any place where securities, currencies, bonds, and other securities are traded between two parties. These markets are the basis of capitalist societies, and they provide capital formation and liquidity for businesses. They can be physical or virtual.

The financial market includes the stock exchanges such as the New York Stock Exchange (NYSE), Nasdaq, the London Stock Exchange (LSE), and the TMX Group. Other kinds of financial markets include the bond market and the foreign exchange market, where people trade currencies.

Features of a Market

There are certain features that help define a market. These are necessary in order for the market to function. The following are the most basic characteristics that shape a market:

  • Arena: This is the platform where transactions are conducted between buyers and sellers. Keep in mind that this doesn't necessarily mean a physical location. It can also mean the area in which all parties involved are spread out.
  • Buyers and Sellers: In order for the market to function, there must be buyers and there must be sellers. The market can't exist if someone isn't buying something that someone else is selling. These entities can be businesses, individuals, or even governments, and they can execute their transactions physically or virtually, thanks to the internet.
  • One Commodity: A single market is dependent on a single commodity, so in order for a market to operate, a related commodity must be present. For instance, wheat is the commodity bought and sold in the wheat market. Electronics make up the electronics market en masse but can be broken down into subcategories.

There are other features, including competition, pricing, and the freedom to buy and sell goods and services.

Regulating Markets

Other than underground markets, most markets are subject to rules and regulations set by a regional or governing body that determines the market’s nature. This may be the case when the regulation is as wide-reaching and as widely recognized as an international trade agreement, or as local and temporary as a pop-up street market where vendors maintain order and rules among themselves.

How Do Markets Work?

Markets are arenas in which buyers and sellers can gather and interact. A market in a state of perfect competition is necessarily characterized by a high number of active buyers and sellers. The market establishes the prices for goods and other services. These rates are determined by supply and demand. Supply is created by the sellers, while demand is generated by buyers. Markets try to find some balance in price when supply and demand are themselves in balance.

What Is a Black Market?

A black market refers to an illegal exchange or marketplace where transactions occur without the knowledge or oversight of officials or regulatory agencies. They tend to spring up when there is a shortage of certain goods and services in the economy, or supply and prices are state-controlled. Transactions tend to be undocumented and cash-only, all the better to be untraceable.

How Are Markets Regulated?

Most markets are subject to rules and regulations set by a regional or governing body that determines the market’s nature. They can be international, national, or local authorities.

The Bottom Line

Markets are an important part of the economy. They allow a space where governments, businesses, and individuals can buy and sell their goods and services. But that's not all. They help determine the pricing of goods and services and inject much-needed liquidity into the economy. By offering a place to conduct transactions, markets allow entities access to the capital they need to further their interests, whether that's to fund infrastructure, fulfill growth plans, make purchases, or invest their money. This helps fuel innovation in order to secure a competitive edge in the marketplace.

Article Sources
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  1. TreasuryDirect. "Auctions."

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