3.1.1 The market as a system

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.

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.

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.

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.

• 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.

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.

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

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

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

Link to Quizlet interactive flashcards and terminology games for Section 3.1.1 The market as a system

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