In the field of Economics, a market system is the one in which there is free competition and prices are determined by the interaction of supply and demand. It can therefore be concluded that a market would exist if there is any contact or communication between potential buyers and potential sellers of a good or service and that an agreement to exchange certain items exists.
For such a market to exist a few conditions would have to be met before and these are:
? There must be at least one potential buyer and one potential seller of the good or service.
? The seller must have something to sell.
? The buyer must have the means with which to purchase it.
? An exchange ratio which is the market price must be determined.
In a mixed economic system, that is, an economy where there is balance between market forces and state intervention, or where the economic decisions are made partly by free market forces of supply and demand and partly by government decisions, exchange usually occurs in two sets of markets. These are the Product markets and the Factor markets.
Before we get onto markets, maybe we should explore the interdependencies that will exist for these markets to exist and this would be referred to as, ‘The interdependence between Households and Firms’.
The interdependence between households and firms
Households can be defined as people who live together and who make joint economic decisions and those who are subjected to others who make such decisions for them. This can be elaborated as follows;
• Every individual in the economy belongs to a household.
• Members of households consume goods and services to satisfy their wants. They are therefore called consumers.
• The total spending of all households on consumer goods and services is called total or aggregate consumption expenditure, or simply total consumption.
• Because households are the basic units in the economy, the term “households” is used to individuals or consumers.
• In a market economy it is households or consumers who largely determine what should be produced.
In a mixed economy most of the factors of production are owned by households.
Households sell their Factors of production to Business firms, and Firms combine these factors and convert them into goods and services. In return for the Factors of production that they supply, the Households receive income in the form of salaries and wages, rent, interest and profit. This income is then used to purchase consumer goods and services which satisfy their human wants. In essence, Household income comes from two main sources:
(1) Households contain workers who sell their time to firms and receive wages in return.
(2) Households are the ultimate owners of the firms—shareholders live in houses too—and thus any profits that firms make are returned to households. All firms in an economy are owned by someone, and any profits they make do not vanish into thin air but must eventually show up as someone’s income.
Firms can be described as units that employ the various scarce Factors of Production to produce goods and services that are sold in the good markets to satisfy the unlimited desires of Households. In other words, Firms are the basic producing units in the economy. In market economy, they largely decide how goods and services will be produced. Most firms operate with the sole intention of realising a profit. They engage in production because they can sell their product for more than it cost to produce it. However, it must be stated here that at times Firms suffer losses instead of gains.
An Entrepreneur would be that someone either an individual or a team, who would organize, manage and assume the risks of such a firm. They would be engaged in taking ideas, new or old, and turning them into successful business ventures.