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P A R T 1 C
h a p t e r 1 : T h e m a r k e t s y s t e m
DB C
A
Getting Started...
In any economy, people, businesses, foreigners and the government buy lots of goods and services, e.g.:
• people buy groceries, clothes and entertainment
• businesses buy components, machinery and energy
• foreigners buy goods from exporters
•
the government buys equipment for schools and medical supplies for hospitals.Goods and services are exchanged when buyers and sellers communicate with each other. Look at how goods are
exchanged in these images.
What is a market?
A market exists when buyers and sellers communicate and exchange goods or
money. Historically, markets were actual places where buyers and sellers met toexchange goods. These days, a market can exist without shops or malls. Buyers and
sellers can trade goods without coming ace to ace. Here are some examples o
some markets today and how they work.
Section A: The market system
PART 1 Demand and supply
Chapter 1: The market system
(a) What is the common activity in these images?
(b) How might prices be determined in B and D? Make a comparison.
(c) What word might you use to describe the locations shown in A–D?
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P A R T 1 C h a p t e r 1 : T h e m a r k e
t s y s t e m
● The second-hand car market. Second-hand cars may be sold by dealers rom
showrooms, car lots or a sales pitch. Buyers can view the cars, perhaps test drive
them and agree a price i they wish to buy. Second-hand cars may also be sold
privately, at auctions and even on the Internet.
● The housing market. In many countries houses are sold on behal o their
owners by estate agents. Buyers view properties, make an oer or the one they
want to buy, then hope their oer is accepted by the vendor (seller). I not, there
may be some negotiation beore a price is agreed or a sale will not take place.
Sometimes houses are sold privately or at an auction.
● The market for US dollars. US dollars are traded in world currency markets.
In these markets buyers and sellers may be linked by telephone or by computer.
Prices are agreed and details o transactions are exchanged. The value o
dollars traded will be moved electronically between the bank accounts o buyers
and sellers.
● The mortgage market. Mortgages are loans used to buy property. They
are usually oered by nancial institutions such as banks and building
societies. People who want a mortgage make a ormal, written application.
I the lender believes the applicant can repay the loan, a mortgage is granted.
The interest rate on the mortgage (the price charged or the loan) is not
usually negotiable.
Functions of a market system
In any country there many dierent markets, which together operate like a system.
This market system, sometimes called the price mechanism, perorms two
important unctions: price determination and resource allocation.
Price determination
The market system determines the prices paid or goods. In any market buyers and
sellers communicate with each other. One o the most important things they
discuss is the price to be paid or the goods. Sellers will oten want more than
buyers are prepared to pay. As a result there is likely to be some negotiation or
‘haggling’. Eventually, the buyer and seller might agree a price and the goods will
be traded. I not the goods will remain unsold.
Resource allocation
The market system can help to allocate a nation’s resources. This is because
resources such as raw materials, land, machines and workers (see chapter 16)
will fow into thriving markets and out o declining markets.
● In thriving markets prices rise. This means sellers probably make healthy prots.
These prots will attract more sellers, so more resources are needed to make
these ‘popular’ goods.
● In declining markets prices all. This results in sellers leaving the market and the
release o the resources that they would have used.
Did you know?Some markets have no price negotiation.
For example, in many shops goods have
price labels and buyers are expected to
pay the price displayed. However, i buyers
do not want to pay the price, they will go
without or buy elsewhere. Piles o unsold
goods send a signal to a seller. Either they
reduce the price or get stuck with the goods.
This shows that communication between
buyers and sellers is still taking place.
Did you know?In many Arab-speaking countries traders and
buyers come ace to ace in a market place
called a souk to exchange goods.
These days, markets don’t always need to be
an actual place. Trading can take place over
the telephone, using newspapers, through
mail order or on the Internet. These are
known as invisible markets.
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