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3
The concept of a market
In a free market, the 
price mechanism 
signals demand and supply conditions to producers and 
consumers. It therefore determines the activities of both producers and consumers, influencing the levels 
of demand for and the supply of goods.
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PART A: THE BUSINESS ORGANISATION, ITS STAKEHOLDERS AND THE EXTERNAL ENVIRONMENT 
 
90
 
3.1 What is a market? 
A market involves 
the buyers and sellers of a good who influence its price
. Markets can be worldwide, 
as in the case of oil, wheat, cotton and copper for example. Others are more localised, such as the 
housing market or the market for second-hand cars. 
A
 market 
can be defined as a situation in which potential buyers and potential sellers (
suppliers
) of a 
good or service come together for the purpose of exchange. 
Suppliers and potential suppliers are referred to in economics as 
firms
. The potential purchasers of 
consumer goods are known as 
households
. 
However, some markets have buyers who are other firms or government authorities. For example, a 
manufacturing firm buys raw materials and components to go into the products that it makes. Service 
industries and government departments must similarly buy in supplies in order to do their own work. 
The demand for goods by firms and government authorities is a 
derived demand
,
 
in that it depends on 
the demand from households for the goods and services that they produce and provide. 
Markets for different goods or commodities are often interrelated. All commodities compete for 
households' income so that if more is spent in one market, there will be less to spend in other markets. 
Further, if markets for similar goods are separated geographically, there will be some price differential at 
which it will be worthwhile for the consumer to buy in the lower price market and pay shipping costs, 
rather than buy in a geographically nearer market. 
3.2 Price theory and the market 
Price theory is concerned with how market prices for goods are arrived at, through the interaction of 
demand and supply. 
A good or service has a