The Components of the Market – Reflections on the First Two Fundamental Observations
The principles outlined in Chapter 2, and the functions they represent, are indeed difficult to grasp at first glance. Anyone who might be intimidated by their location should skip them on first reading. To help explain and aid understanding of these concepts, the following three chapters illustrate the principles supported in the outline by taking a step back from theory and presenting concrete realities. Once the reader is comfortable with each of the principles, it is recommended to revisit the Chapter 2 outline until it is fully understood and no longer daunting.
The objective of this chapter is to provide an initial introductory examination of the market. This should begin to clear up some of the misconceptions about the functioning of markets that have created enormous confusion. Every reader's basic understanding of the market should be enhanced by laying out several market principles in an easy-to-understand manner. It will be pointed out below that although all the details of the principles of the market may not be fully understood, the fact is that every consumer already has a subconscious understanding of the market which enables him to satisfy his daily needs. It is this unconscious understanding that is the basis upon which each individual builds a more comprehensive market knowledge.
price and value
Most investors and traders distinguish between understandable market situations, where prices and values vary, and organized markets, where prices and values are always the same. Unbeknownst to most participants, all markets—not just unorganized everyday markets—have one general thing in common: All markets differ in price and value, and the underlying principles that motivate buying and selling are the same. (Most investors and traders in organized markets understand this inherently, but it is most prominently shown in Graham and Dodd's Securities Analysis.) Moreover, every market has The collective needs and goals of its participants are reflected through its range of activities. In order to understand any market, we need to separate and isolate the parts of the market that motivate the activity of each class of players.
But while most market exams are participant-focused, truly understanding market logic requires taking a step back to examine and understand the true purpose of the market and how important that purpose is in all market understanding. Understanding the purpose of a market is key to being able to benefit from it. However, it is easy to be misled and confuse the external outcome of the market (i.e. price is the rationing of supply and demand) with its purpose, the reason for its existence.
purpose of the market
Markets exist only to facilitate trade. That's its sole purpose. This fact is the starting point and key concept to grasp when analyzing or participating in any market.
As mentioned above, to understand any market, it is also necessary to grasp the needs and goals that motivate the participants. In a marketplace, the needs and goals of motivating participants manifest themselves in their ongoing buying and/or selling. Therefore, observing and reflecting on a participant's inner needs and goals helps to gain market understanding, but observing a participant's market participation—his buying and selling agenda in the market—provides valuable information that is essential to accurately understanding the market and making decisions. The basis for buying and selling decisions.
It becomes easier to understand why markets existed solely to facilitate trade, and the remaining logical principles and considerations behind each market, by considering the case of a single producer and a single consumer who traded before centralized markets existed, and then As the market evolves, it is again part of a large and complex market.
before the market
Where there is no centralized market, where there are products and demand for them, there will of course be trade. In other words, a producer and a consumer can transact. In doing so, they create a market, but not a real market. Without a market, both parties to a transaction, buyers (consumers) and sellers (producers), face a very narrow and inflexible situation. Only a limited stream of information is available. Furthermore, this information is not disseminated to producers or consumers in an efficient manner.
This situation leaves the consumer with little knowledge of the costs and benefits of the product—how much it should cost and how it will meet his needs, etc. As a result, he is at a disadvantage in achieving his main goal: buying enough to satisfy his needs as cheaply as possible. To accomplish his goal, he needs to assess the usefulness of the product, consider possible substitutes, and weigh any other information that is critical to determining value.
While every consumer has different needs, every producer has the same need: to stay in business by selling their products. Since the producer's primary goal is to maximize profit, he always seeks to determine the profit-maximizing price, and so does advertising. For example, he would be happy if he could produce more at a lower price, gain more unit savings through economies of scale, and pass only some of these savings on to consumers. In doing so, he will achieve his goal of maximizing profits.
But without a market, producers cannot get the information they need from transactions. He wondered how the product would meet the individual needs of consumers across a range of price points. In other words, is he selling the product at a price above or below what most potential customers are worth? Without a place where other products can be compared, the producer cannot improve his marketing by improving the product or repricing it, because he does not have enough information on how the product is selling in the competitive environment.
Furthermore, without a market, the consumer has no time period to indicate whether he wants to buy more or less of a product at a given price. In short, without a market, producers have no effective way to increase business - to facilitate trade.
Even contracts between buyers and sellers for the transfer of goods at a fixed price at regular intervals do not facilitate trade or information as market conditions do. While contracts may be in the interests of both parties when they are signed, there is no flexibility and no way to expand trade other than through communication. Contracting with each other helps this situation, but it does not promote an increase in trade, only the amount guaranteed when the contract is negotiated.
Going back to our situation, both producers and consumers want to improve their lives because they are basically self-interested people who want to satisfy their own needs and achieve their own goals. In fact, in any free economy, one would be hard-pressed to find an example of a manufacturer or distributor of a product not wanting to do more business -- in order to facilitate more trade.
Unable to improve their fortunes, both sides are frustrated with no market. They need a more effective communication and distribution system that meets their specific needs and goals. They need an arrangement or entity that facilitates trade.
Development of the market
Both producers and consumers realize that more goods and services can be sold if potential customers realize that goods are regularly sold at a certain time, in a certain place. This will benefit the producer as he meets his need to stay in business while also maximizing his profits. At the same time, consumers will be able to meet their individual needs and will be in a better position to fulfill their needs at the lowest possible cost.
At some point, the two arrange to meet regularly at regular intervals to determine whether the producer's product is redeemable for the consumer's currency. The market was born. With such meeting protocols in place, more communication and product distribution can now take place. As a springboard for the realization of the needs and goals of both parties through the facilitation of trade, the market quickly became a reliable institution. Consumers can inspect, compare, and ultimately buy more goods, while more goods are produced, priced competitively to maximize profits, and ultimately sold by producers. Both consumers and producers are given a range of opportunities to act or not to act, in which case competition determines value.
Markets provide the ability for both parties to any transaction to satisfy their needs and maximize their objectives on a practical level through increased trade and competition. Thus, a market always satisfies the needs of producers and consumers, and it must do so if it is to thrive. In fact, no market can exist for long without facilitating trade between producers and consumers. In other words, when a market fails to meet the needs of producers and consumers while allowing each participant to maximize its goals, the volume of transactions in the market dries up.
A market has a centralized location, a fixed time, reliable participants, and most importantly, it facilitates competition between producers and consumers and is therefore scalable.
mature market
A mature market can take the form of a franchise, a distribution right, a series of franchises or distribution rights, a network of wholesalers or one or a series of wholesale or retail outlets, and of course an organized exchange trading stocks, Futures and/or Options. Regardless, a mature market constantly seeks to facilitate trade, thereby allowing producers to maximize profits and consumers to satisfy demand. A mature market expands the distribution of goods, allowing more transactions. Both producers and consumers know that if they choose to do business in a mature market in different quantities, taking into account the prices at the time. Therefore, the form or structure of the market is not important, as long as the mature market meets the requirements of location, time, participants and most importantly competition. If this is done, both parties benefit from the existence of the market, as they can use the information generated by the market to facilitate more trade.
The most valuable service any marketplace provides involves generating and disseminating information. Markets are a source of information by considering any type of market, but especially auction houses. Renowned auction houses, for example, stock Christie's and Sotheby's to market art, antiques, collectibles, and any other items that are in limited supply. The form of marketing, the auction, is a kind of marketplace. The purpose of driving customers to these home auctions is the same as in every market, not to quantify supply and demand, but to facilitate transactions in the art, antiques and collectibles market.
The first step in running a successful auction of this type involves advertising and promoting the product to be auctioned to the target market (the world of art, antiques or collectibles). The art world recognizes the value of information on past art transactions for similar products and weighs it in determining reasonable expectations of future value. Therefore, before the next auction, all participants will carefully study the past auction results - transaction information. Transaction information provided by the public auction market is valuable information to both potential and actual buyers and sellers.
Afterwards, the auction results will be announced and distributed. Transaction data reflects market conditions and at the same time serves as an advertisement that facilitates more transactions, potentially bringing more artworks to the market for sale or attracting more collectors as buyers. Those wishing to assess the personal collecting market are now aware that its value rises or falls, or stays the same, depending, of course, on the prices of comparable works. Likewise, auction houses and the art world both want more deals. They can do this because they have an inherent market.
in conclusion
The main purpose of this original and introductory study of markets is to clear up some of the misconceptions about the functioning of markets that have led to confusion. Two very important points have been made clear: the sole reason for the existence of any market, whether it is an organized, federally regulated financial exchange, or an open air food market, or anything in between Neither to quantify supply and demand, nor to allocate scarce resources, but to facilitate trade. Additionally, all functioning marketplaces generate information alongside advertising opportunities. Any logical understanding of any market must begin with an acknowledgment of these fundamental principles of each market.