Alpha Economic Model

About Markets

Introduction
About Money
About Markets
WIR Economic Model

Introduction

In economics the term "market" does not simply mean an area where buyers and sellers meet to buy and sell commodities.

Rather it implies a device or mechanism which gathers and transmits information with regards to the consumption (Demand Sector) plans and production (Supply Sector) plans of buyers and sellers and uses some form of measure to record the value of commodities sold and purchased.

An efficient market mechanism permits participants of the market to trade more freely towards their optimal potential in the production, sale, or supply of commodities. In this sense, a market is an institution through which commodities are sold and purchased.

It is the workings of organized markets that permits the co-ordination of selling and purchasing opportunities, and it is the gathering and transmitting of information, the use of an efficient monetary system and the reaction of buyers and sellers to price signals as influenced by the twin factors of supply and demand, which facilitates commodities to be sold and purchased.  

Supply and Demand

Adam Smith, the Scottish political economist, argued that a system of prices and free markets would lead the market “by an invisible hand” to produce a supply of products and services which best matched the markets purchasing preferences.

If there is a demand for a product or service in the market, its value and price will rise in response to the demand. With increased demand, comes increased production and supply to meet the demand to purchase and the cost to produce and supply will decrease, allowing the sale to become more profitable.

Because the demand for the commodity has increased other companies are induced to produce and supply the commodity and enter the market motivated by the demand and the opportunity for profit. Now the market has an additional supply, the competition amongst suppliers seeking to sell will grow which causes a decrease in the commodities value and price, a rise in the cost to supply with a corresponding decrease in gross margins, and the demand sector responds by purchasing more.

If in the market, where buyers and sellers confront each other, the price at which the sellers will supply, is matched by the buyers demand to purchase, then the market is in equilibrium. However, if more supply is available to the market than is the demand at the price being asked, there becomes an in excess supply and the market is no longer in equilibrium.

As the market is no longer in equilibrium, this information is quickly assessed by the suppliers, who find either an excess of products building up in their warehouses, and/or an increase in unbilled time for services and/or an increase of un leased space offered, and they react by either reducing their price deteriorating margins and prostituting the value of their offerings, to be competitive in the market and/or more astutely search for a new market to sell their offerings to retain margins and price integrity.

Astute business operators who understand how the market mechanism works, when faced with the dilemma of their existing market not being in equilibrium, with an excess in supply and a corresponding low demand are now entering one or more of the new organized markets promoted by private enterprise, induced by the opportunity of either maintaining or gaining an increase in sales, whilst at the same time retaining or gaining an increase in gross margins.
Introduction
About Money
About Markets
WIR Economic Model

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