What markets do, and who decides

A market is any arrangement where buyers and sellers come together to trade. It can be a real place, online or even by phone.

• At a farmers’ market, growers and shoppers meet face to face.
• On online marketplaces, such as Mercado Libre in Latin America, Jumia in Africa and Taobao in China, strangers trade without meeting.
• On a stock exchange, people buy and sell shares: small pieces of ownership in a company. Since the Tokyo Stock Exchange closed its trading floor in 1999, computers have handled all its regular trades.

What makes a market is the dealing, not the building. So when economists talk about the market for strawberries, they mean all the buyers and sellers of strawberries, wherever they deal.

• It carries information. A rising price is a signal: a message that buyers want more than sellers are offering. A falling price says there is more on sale than buyers want.
• It creates an incentive: a reward or a penalty that changes what people do. A higher price rewards sellers for making more. For buyers it works like a penalty, so they buy less.

The strawberry grower never surveyed her shoppers. Selling out, even at 4 dollars, told her what they wanted. Her higher price told other farmers.

A price also rations: it shares out what there is among buyers. That third job comes later in this unit.

Every society must decide what to make, how to make it and who gets it.

• In a market economy, millions of deals like the strawberry sales decide. People and companies, not the government, own most farms and firms. They make what buyers will pay for, as cheaply as they can, and the goods go to whoever is willing and able to pay.
• In a command economy (also called a planned economy), a planner decides. The government owns or controls most farms and factories. Its officials set their targets, fix the prices and share out the goods. Planners ran the Soviet Union, centred on Russia, this way from 1928 until it broke up in 1991.
• Most economies are mixed: markets and the government both decide. Usually markets make most things, while the government runs services such as schools, courts and roads, and sets rules. No real economy is a pure market economy, where markets decide everything. China has let markets grow since 1978, but the government owns many of its biggest firms. On a 2022 list of the world’s 500 companies that took in the most money, about 7 in 10 Chinese firms were government-owned.