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1.1 What is a market?

The most common conception of a market is as a physical place where we go to buy food or other products, or for the smallholder, the local gathering where periodically, they sell their produce. In economic, business, and development terms, however, 'the market' has different meanings.

How would you define a market?

Consider the definitions of a 'market' presented in 1.1.1.

1.1.1 The market - some definitions

(1) The economist's perspective

'The term 'market' as used by economists has a different meaning from ordinary usage. It does not mean literally the physical place in which commodities are sold or purchased (as in 'village market'), nor does it mean the stages that a commodity passes through between the producer and the consumer (as in marketing channels). Rather it refers in an abstract way to the purchase and sale transactions of a commodity and the formation of its price. Used in this way, the term refers to the countless decisions made by producers of a commodity (the supply side of the market) and consumers of a commodity (the demand side of the market), which taken together determine the price level of the commodity ... the term is detached from any particular geographical coverage. The geographical scope of the term depends on the context in which it is being used. It may refer to the local situation in some part of the rural economy, for example the market for cassava in southern Tanzania, or it can refer to the country as a whole, the region, or the international economy. Thus the expression 'world market' refers to the process of price formation at an international level for traded agricultural commodities.'

Source: Ellis (1990) pp. 6-7.

(2) The business perspective

Business people tend to use the term 'market' to describe the groups of individuals or organizations that make up the pool of actual and potential customers for their goods and services. These groups fall into one or more of the following categories: geographic, demographic or socioeconomic, psychographic, behavioural or sectoral.

Source: summarised from Brown (1994) pp. 10-11.

(3) The New Institutional Economics' perspective

Markets are a type of 'institution' or mechanism that exists to facilitate exchange, co-ordination and allocation of resources, goods and services between buyers and sellers, between producers, intermediaries and consumers; competitive markets can provide 'efficient' co-ordination by reducing the cost and risk of carrying out transactions, can encourage business development and also help to achieve broader economic objectives. But markets are not always competitive or efficient. Markets as an institution can be imperfect.

Source: adapted from ADB-DFID (2005) p. 4.

What would you say are the main differences between these views?
The first definition, that of an economist, focuses on the market as a process through which prices are set by repeated buying and selling transactions. This market may relate to a particular geographical area or region, or may be global.

The second definition, from a business marketing perspective, focuses on the actual or potential customers for a product or service. Hence the second definition is concerned less with the process of setting prices and more with the identification of customers to whom the product will appeal.

Finally, the third definition derives from the New Institutional Economics (NIE) approach to development. This approach places attention on the 'governance' of economic exchange (that is, the rules and practices governing how buyers and sellers come together), the transaction costs and risks involved in market exchanges between buyers and sellers, and the means of reducing these costs and risks. We return to the theme of transaction costs in Section 3.3.

Check your answer

Clearly different participants in markets have quite different views on the definition and role of markets. No view is necessarily more 'correct' than the other - as noted above by Ellis, the meaning depends on the context.