Question

Give an example of a market where you make purchases or work. Explain how the market works. Who is/are the buyer(s)? Who is/are the seller(s)? How many buyers and sellers participate in this market? What is the product and/or service being sold? How are prices set in the market? How is the quality/service set? Are there innovations in the market? How do they occur? In your market, is there a surplus, shortage or equilibrium most of the time? When (if ever) does the market come to equilibrium? How do you know when there is equilibrium?

Answer 1

Basically a market is a platform where buyers and sellers come together and make a transaction of either a good or a service. Let's consider a simple example of market of laptop to understand how the market works:

It is an example of a market where a student (consider yourself) make purchase of laptops or desktop computer. The market (like any other market) works on the basis of supply and demand.

• The buyers in a laptop market can be a students (like yourself), and many others like bankers, technicians, politicians etc. So there are huge number of buyers in this market. On the supply side, the firms that produce/sell laptop or desktop computer are sellers in the market. Here too, there are large number of firms like Apple, Dell, HP. Lenovo and the list goes on. So, in this market there are many buyers and many sellers.
• Generally for such type of markets, prices are set by demand and supply factors. If demand dominates supply, price is high and if supply dominates demand then prices are low. Also, the higher the competition (among the firms) in the market the lower the price they charge from customers to get a larger market share, because the firms sell only slightly differentiated products (almost all computers perform same type of basic functions).
• The quality of the good (laptop computer in our case) improves as consumers move upwards to buy a higher valued brand for example many people find apple computers to be of superior quality than any other brand's computers. The market for laptop has been under constant innovation. This is reflected from evolution of desktop computers to laptop computers then to touch screen computers (basically tablet computers) etc. Also, with new innovation prices have gone down and the service has improved in this market.
• All this innovation has been possible only by investments in technological upgradation and R&D by the firms in the market with the help of government support.
• The equilibrium is achieved in the market when demand is equal to the supply. It is only when this condition is fulfilled that the price is determined in the market. So in case of laptop markets also, market price reflects that equilibrium has been achieved in the market. However, note that, this kind of equilibrium is dynamic in nature in the sense that it can vary from time to time. It means to say that price of your laptop this year can be different from what it will be next year.
• If the market is not in equilibrium (Demand and supply are not equal), there are upwards or downward movements in prices (depending on which side dominates) and this adjustment in price will continue till the equilibrium is achieved. Hence, any disequilibrium in the market is corrected by itself (via price adjustment).

Note that this is example of just one market but the same explanation can be extended to any other commodity that an individual consume. In Reality, we make purchases in n number of goods and services and as many examples can be created as this.