3.1.1 The market as a system
Helpful prior knowledge and learning objectives
Helpful prior learning:
Section 1.1.1 The economy and you, which explains what an economy is and how it is relevant to students’ lives
Section 1.1.2 The embedded economy, which explains the relationship between the economy and society and Earth’s systems
Section 1.3.6 Households, markets, state and commons, which explains four provisioning institutions in the economy and their interconnection
Section S.1 Systems thinking, which explains what a system is and why systems thinking is useful. (coming soon)
Learning objectives:
describe the market provisioning institution in terms of its parts, relationships and overall function
Imagine walking through the bustling streets of a Moroccan market, called a souk, where the scent of spices fills the air and colourful fabrics catch your eye (Figure 1). Sellers and buyers negotiate prices in a lively way, ending with a handshake. Now imagine a quiet Swiss office where people sit behind computers, buying and selling tonnes of cocoa with the press of a button to help manufacturers secure the cocoa supplies they need for their chocolate bars (Figure 2).
From crowded food markets to sophisticated commodity markets, each market offers a unique snapshot of human activity as we work together to meet human needs and wants.
Figure 1. A Moroccan souk where exchanges are made in person
(Credit: KrisNM, CC BY-NC-ND 2.0)
Figure 2. Trading cocoa on international markets is done virtually
(Credit: Jack Sparrow, Pexels licence)
What is a market?
A market is a provisioning institution where products are bought and sold at a price. Markets are systems, sets of interdependent parts that organise to create a functional whole. Let’s break this down for markets.
Market parts
Market systems have parts such as:
products: goods (tangible) and services (intangible) that that businesses make
producers: the people and their businesses that create goods and services
consumers: the people who buy products, which could be people in households, or it could be other producers
price: an amount of money that consumers pay producers in order to obtain the product.
Figure 3. Markets are spaces where people can buy things they need, like food, for a price
(Credit: Alex Hudson, Unsplash license)
There are other people and institutions involved in making specific market transactions possible. For example, workers physically produce the products that are sold, perhaps along with machines. Household members care for human workers every day. Retailers sell the products, but may not physically produce them. States make laws and regulations about how products are produced. Banks may fund business operations and create the money used in exchanges. Markets are embedded in many other complex systems, with many actors and roles.
Market relationships
The parts of a market have interdependent relationships with one another. Workers are employed by producers or retailers, consumers and producers exchange money and products. The relationships between people and how they interact in markets to make exchanges vary from place to place and by product type due to culture, laws, history, technology and relative power. We will explore many of these factors in this subtopic as we learn how markets work.
Market functions
Markets have a number of overlapping functions in the economy, some of which they perform better than others:
meeting human needs and wants: markets allocate resources and products by directing them to where they are needed or wanted. Prices are one (among many) signals that inform businesses about what society needs and wants, with higher prices acting as a signal and incentive for businesses to supply more of a good (Section 3.1.2). But prices also have a rationing role. They determine who is able to access the products, only those who can pay, so markets are inherently unable to completely fulfil this function.
providing profits for producers: markets provide profits to businesses who produce and sell things that people need and want, providing an incentive for action;
encouraging competition: businesses compete with each other to provide products that consumers need and want, which can lead to efficient use of resources and innovation, and more choices for consumers;
making exchange easier: markets can make it easier for producers and consumers to find each other and make exchanges to satisfy human needs and wants.
Some of these functions may undermine others. For example, if businesses try to maximise profit (Section 3.2.2), it may make it harder to meet human needs if they set high prices on products consumers really need, or if businesses produce non-necessary goods that only wealthy people can buy. Competition among firms may lead them to cut wages, which undermine people’s ability to purchase things they need.
Each of these functions might require a different design for market relationships. Economists, businesses and consumers may disagree about which of these functions are the most important, and therefore about how markets should be shaped by the state and the rest of society. This subtopic will explore some of these disagreements.
What types of markets are there?
Markets can be classified in a number of different ways, including:
what they sell: product markets sell final, finished goods and services to consumers. Factor markets sell resources such as energy and materials that producers need to make their products. Labour markets, also considered a factor market, is where workers sell their labour. Financial markets sell money-related goods and services, like countries’ currencies, insurance, loans and shares of companies.
scale (related to place): we can also classify markets by how close the producers and consumers are to one another. Local markets occur in a village, town or city. Tailoring services (Figure 4) will likely be sold in a local market. Regional markets might involve exchanges over several cities or states. National markets have exchanges that occur across an entire country. And global markets see exchanges occur between people around the world.
Figure 4. A tailor (left) is likely to operate in a local market, but some people in the garment industry work on a mass scale serving global markets (right)
(Credit: Andrea Kirkby, CC BY-NC 2.0 and ILO Asia-Pacific, CC BY NC-ND 2.0)
scale (number of sellers/buyers): some markets have very few buyers and sellers, called niche markets. These markets sell unique and/or very expensive products produced in small numbers with only a few people who are willing and able to buy them (Figure 5). Mass markets, however, sell very large quantities of similar or the same goods and services to very many consumers.
Figure 5. The market for unique art pieces, like this Ai Weiwei sculpture is very small, a niche market
(Credit: Metal Chris, CC BY-NC 2.0)
who the buyers and sellers are: business-to-consumer (B2C) markets involve businesses who sell directly to the end consumers who use the products. For example, a grocery store sells food to consumers who use it to make meals. In business-to-business (B2B) markets, businesses sell products to other businesses. For example, a steel manufacturer sells steel to other businesses, like a construction company, who use the product to make other goods. Consumer-to-consumer (C2C) markets are where owners of products resell to other consumers, for example in flea markets (Figure 6).
Figure 6. A flea market is an example of a consumer-to-consumer market
(Credit: Leigh, CC BY-NC 2.0)
in-person or e-commerce: an in-person market involves a local, in-person exchange, like a hairdresser. E-commerce involves people making an exchange on a digital platform like Amazon or Alibaba. The firms that host these exchanges are businesses themselves, called platform firms.
How are markets related to the rest of the economy?
The embedded economy model (Figure 7) gives an overview of the relationship between markets and the rest of the economy.
Markets are one of four provisioning institutions in the economy. The people and businesses in markets have relationships with people in households, the commons, and the state. Markets are embedded in society and Earth’s systems. The relationships between people in markets and other provisioning institutions are influenced by laws, culture, history, technology, incomes, and power relationships.
Figure 7. Markets in the embedded economy
(Credit: Kate Raworth and Marcia Mihotich CC-BY-SA 4.0)
Thus, when politicians or the media refer to “free markets”, it’s important to remember that markets are never really free. They are always and everywhere shaped by social and ecological forces.
Activity 3.1.1
Concept: Systems
Skills: Thinking skills (transfer)
Time: 25 minutes
Type: Individual, pairs, or group
Option 1: Markets as a system
Examine the photograph again from Figure 3, a market exchange. Alone, in pairs or a small group, consider the following questions:
Who/what are the parts of the system that you can see in the photo?
What are their relationships?
Who/what are parts of the system that you cannot see in the photo?
What are their relationships?
How would you classify this market, what type(s) is it?
Why is it so important to recognise the invisible parts and relationships of a market system?
Figure 3. Markets are where people can buy things they need, like food, for a price
(Credit: Alex Hudson, Unsplash license)
Option 2: Markets in your own life
Consider the types of markets that you engage with. In writing, or through another medium, describe the markets in your life.
What types of things do you or other members of your household buy in markets?
Who do you engage with and what relationships do you have with them?
For which things do you use local, in-person markets and for which things do you use other channels or types of markets? Why?
Ideas for longer activities and projects are listed in Subtopic 3.5 Taking action
Checking for understanding
Further exploration
Tell a New Story - 2/7 Doughnut Economics - a short animation from the Doughnut Economics Action Lab that outlines the current narrative about markets and our economies. You will see that this Section 3.1.1 already works to counter that narrative by describing the market as just one of four provisioning institutions, all of which are socially and ecologically embedded. Difficulty level: easy
Sources
Blink, J., & Dornton, I. (2020). Economics: Course Companion. Oxford: Oxford University Press.
Kognity (2022). IB DP Economics HL FE2024. Stockholm: Kognity.
Meadows, D. H. (2015). Thinking in Systems. Chelsea Green Publishing.
Raworth, K. (2017). Doughnut economics: seven ways to think like a 21st century economist. London: Penguin Random House
Terminology
market: a system where people buy and sell goods and services for a price.
price: an amount that must be paid to access a good or service; can be money or some other medium of exchange
commodity: something that can be bought and sold, often, though not always referring to raw materials
provisioning institution: a group of people and their relationships as they try to meet human needs and wants
system: a set of interdependent parts that organise to create a functional whole
product: something that a business produces for sale, a good (tangible) or service (intangible)
good: tangible (you can feel and touch them) items used to meet human needs and wants
service: intangible (you cannot feel and touch them) activities used to meet human needs and wants
producer: the people and their businesses that create goods and services
consumer: someone who buys and uses resources and products ot meet needs
household: a system where people living together care for each other and do domestic work, often termed the 'core economy'
regulation: a rule that guides individual or group behaviour and enforced by an authority
culture: the beliefs, values, attitudes, behaviours and traditions shared by a group of people and transmitted from one generation to the next
power: the ability to influence events or the behaviour of other people
allocate: to distribute something
supply: the quantity of a product that producers are willing and able to supply at various prices
rationing: allowing each person to have only a fixed amount of something
profit: total revenue minus total cost
incentive: something that motivates or encourages someone to do something
efficiency: the ratio of resource inputs compared to outputs
wage: payment for work
state: a system that provides essential public services, and also governs and regulates other economic institutions
product market: a market where final, finished goods and services are sold to consumers
factor market: a market where resources such as energy and materials needed to make products are sold to businesses
labour market: the market where household members sell their labour to firms who pay a wage
financial market: markets that sell money-related goods and services, like countries’ currencies, insurance, loans and shares of companies.
currency: a system of money in general use in an area
scale: the size of something
niche market: markets that sell unique and/or very expensive products produced in small numbers with only a few people who are willing and able to buy them
mass market: markets that sell very large quantities of similar or the same goods and services to very many consumers
business-to-consumer (B2C): market activity where products are sold from businesses to consumers
business-to-business (B2B): market activity where products are sold from businesses to businesses
consumer-to-consumer (C2C): market activity where used products are sold from consumers to consumers
e-commerce: markets where exchanges are made online
platform firm: firms that host market exchanges between other people and businesses
embedded economy model: an economic model showing that the economy is shaped by society and dependent on nature
economy: all the human-made systems that transfer and transform energy and matter to meet human needs and wants
commons: a system where people self-organise to co-produce and manage shared resources.
embedded: to be contained inside something else