3.1 What are markets?

Markets provide and allocate a wide range of goods and services in most economies around the world. Prices in markets play a leading role, rationing goods among people who want them and as feedback and incentives for producers and buyers. 

Markets can be very effective at producing products, but they are not the only way, nor always the best way, to meet human needs and wants. It is important to remember that markets, and the businesses within them, are embedded in social and ecological systems and must support those systems for healthy economies that meet human needs within planetary boundaries.

Note for teachers / students: These learning materials address markets somewhat differently from most mainstream economics courses. Instead of linear supply and demand diagrams, the materials use causal loop diagrams, which provide students a more dynamic understanding of markets as a system.

At the end of Subtopic 3.1 What are markets? you should be able to:

• describe the market provisioning institution in terms of its parts, relationships and overall function

• define demand and analyse the factors that affect demand

• define supply and analyse the factors that affect supply

• explain how changes in demand and supply affect prices in markets through shifts in power between consumers and producers

• explain how price changes provide feedback in markets

• describe the concept of elasticity in the context of price elasticity of demand and supply, cross-price elasticity of demand, and income elasticity of demand

• describe  the relationship between price elasticity of demand and market power, and its significance for producers, consumers and the state

• analyse the factors that impact price elasticity of demand

• discuss the uses and limitations of markets as a provisioning institution

• explain how markets are embedded in ecological systems through businesses’ use of energy and material resources and their impact on ecological systems in the context of planetary boundaries

• explain how markets are embedded in social systems with attention to culture, social movements, law and state policies