Definition of a market

Published by Patrick Mutisya · 14 days ago

Cambridge IGCSE Economics 0455 – The Allocation of Resources: The Role of Markets – Definition of a Market

The Allocation of Resources – The Role of Markets in Allocating Resources

Objective

To be able to define a market and explain its key characteristics.

Definition of a Market

A market is any arrangement or system where buyers and sellers interact to exchange goods, services, or resources for money or other goods and services. It provides the platform through which the forces of demand and supply determine the price and the quantity of a product that is bought and sold.

Key Characteristics of a Market

  • Voluntary exchange: Participants choose to trade because they expect to be better off.

  • Price mechanism: Prices are set by the interaction of demand and supply.

  • Competition: Multiple buyers and sellers compete, influencing price and output.

  • Information flow: Buyers and sellers have access to information about prices, quality, and availability.

  • Legal framework: Property rights and contract enforcement are upheld by law.

Types of Markets

  1. Physical markets – e.g., local shops, supermarkets.

  2. Virtual markets – e.g., online platforms such as e‑commerce websites.

  3. Financial markets – e.g., stock exchanges, bond markets.

  4. Labour markets – where employers seek workers and workers seek jobs.

Market vs. Non‑Market Allocation

AspectMarket AllocationNon‑Market Allocation
Decision‑makingBased on price signals and profit motiveBased on central planning, tradition or need
Resource distributionAllocated to highest valued uses as indicated by willingness to payAllocated according to government directives or social norms
EfficiencyOften leads to allocative efficiency (price = marginal cost)May result in inefficiencies such as shortages or surpluses
FlexibilityQuickly adjusts to changes in consumer preferences and technologyAdjustment can be slow due to bureaucratic processes

Suggested diagram: Supply and demand curves intersecting to show market equilibrium price and quantity.

Why Understanding the Definition Matters

Grasping what a market is enables students to analyse how resources are allocated in different economic systems, to evaluate the effectiveness of market mechanisms, and to understand the role of government intervention when markets fail.