What is a Market?
PRINCIPLES OF ECONOMICS
by
ALFRED MARSHALL
BOOK V
GENERAL RELATIONS OF DEMAND, SUPPLY AND VALUE
CHAPTER 1
INTRODUCTORY. ON MARKETS
1. A business firm grows and attains great strength, and afterwards perhaps stagnates and
decays; and at the turning point there is a balancing or equilibrium of the forces of life
and decay: ... And as we reach to the higher stages of our work, we shall need ever more
and more to think of economic forces as resembling those which make a young man grow
in strength, till he reaches his prime; after which he gradually becomes stiff and inactive,
till at last he sinks to make room for other and more vigorous life. But to prepare the way
for this advanced study we want first to look at a simpler balancing of forces which
corresponds rather to the mechanical equilibrium of a stone hanging by an elastic string,
or of a number of balls resting against one another in a basin.
We have now to examine the general relations of demand and supply; especially those
which are connected with that adjustment of price, by which they are maintained in
"equilibrium." This term is in common use and may be used for the present without
special explanation. ...
We must begin with a short and provisional account of markets ...
2. When demand and supply are spoken of in relation to one another, it is of course
necessary that the markets to which they refer should be the same. As Cournot says,
"Economists understand by the term Market, not any particular market place in which
things are bought and sold, but the whole of any region in which buyers and sellers are in
such free intercourse with one another that the prices of the same goods tend to equality
easily and quickly."(1*) Or again as Jevons says: -- "Originally a market was a public
place in a town where provisions and other objects were exposed for sale; but the word
has been generalized, so as to mean any body of persons who are in intimate business
relations and carry on extensive transactions in any commodity. A great city may contain
as many markets as there are important branches of trade, and these markets may or may
not be localized. The central point of a market is the public exchange, mart or auction
rooms, where the traders agree to meet and transact business. In London the Stock
Market, the Corn Market, the Coal Market, the Sugar Market, and many others are
distinctly localized; in Manchester the Cotton Market, the Cotton Waste Market, and
others. But this distinction of locality is not necessary. The traders may be spread over a
whole town, or region of country, and yet make a market, if they are, by means of fairs,
meetings, published price lists, the post-office or otherwise, in close communication with
each other."(2*)
Thus the more nearly perfect a market is, the stronger is the tendency for the same price
to be paid for the same thing at the same time in all parts of the market: but of course if
the market is large, allowance must be made for the expense of delivering the goods to
different purchasers; each of whom must be supposed to pay in addition to the market
price a special charge on account of delivery.
3. In applying economic reasonings in practice it is often difficult to ascertain how far the
movements of supply and demand in any one place are influenced by those in another. It
is clear that the general tendency of the telegraph, the printing-press and steam traffic is
to extend the area over which such influences act and to increase their force. The whole
Western World may, in a sense, be regarded as one market for many kinds of stock
exchange securities, for the more valuable metals, and to a less extent for wool and cotton
and even wheat ... .
There are many special causes which may widen or narrow the market of any particular
commodity: but nearly all those things for which there is a very wide market are in
universal demand, and capable of being easily and exactly described. Thus for instance
cotton, wheat, and iron satisfy wants that are urgent and nearly universal. They can be
easily described, so that they can be bought and sold by persons at a distance from one
another and at a distance also from the commodities. If necessary, samples can be taken
of them which are truly representative: and they can even be "graded," as is the actual
practice with regard to grain in America, by an independent authority; so that the
purchaser may be secure that what he buys will come up to a given standard, though he
has never seen a sample of the goods which he is buying and perhaps would not be able
himself to form an opinion on it if he did.(4*)
Commodities for which there is a very wide market must also be such as will bear a long
carriage: they must be somewhat durable, and their value must be considerable in
proportion to their bulk. A thing which is so bulky that its price is necessarily raised very
much when it is sold far away from the place in which it is produced, must as a rule have
a narrow market. ...
4. Let us then consider more closely the markets for things which satisfy in an
exceptional way these conditions of being in general demand, cognizable and portable.
They are, as we have said, stock exchange securities and the more valuable metals.
Any one share or bond of a public company, or any bond of a government is of exactly
the same value as any other of the same issue: it can make no difference to any purchaser
which of the two he buys. Some securities, principally those of comparatively small
mining, shipping, and other companies, require local knowledge, and are not very easily
dealt in except on the stock exchanges of provincial towns in their immediate
neighbourhood. ...
But the strongest case of all is that of securities which are called "international," because
they are in request in every part of the globe. They are the bonds of the chief
governments, and of very large public companies ... . For bonds of this class the telegraph
keeps prices at almost exactly the same level in all the stock exchanges of the world. If
the price of one of them rises in New York or in Paris, in London or in Berlin, the mere
news of the rise tends to cause a rise in other markets; and if for any reason the rise is
delayed, that particular class of bonds is likely soon to be offered for sale in the high
priced market under telegraphic orders from the other markets, while dealers in the first
market will be making telegraphic purchases in other markets. These sales on the one
hand, and purchases on the other, strengthen the tendency which the price has to seek the
same level everywhere; and unless some of the markets are in an abnormal condition, the
tendency soon becomes irresistible.
On the stock exchange also a dealer can generally make sure of selling at nearly the same
price as that at which he buys; and he is often willing to buy first class stocks at a half, or
a quarter, or an eighth, or in some cases even a sixteenth per cent less than he offers in
the same breath to sell them at. If there are two securities equally good, but one of them
belongs to a large issue of bonds, and the other to a small issue by the same government,
so that the first is constantly coming on the market, and the latter but seldom, then the
dealers will on this account alone require a larger margin between their selling price and
their buying price in the latter case than in the former.(5*) This illustrates well the great
law, that the larger the market for a commodity the smaller generally are the fluctuations
in its price, and the lower is the percentage on the turnover which dealers charge for
doing business in it.
Stock exchanges then are the pattern on which markets have been, and are being formed
for dealing in many kinds of produce which can be easily and exactly described, are
portable and in general demand. The material commodities however which possess these
qualities in the highest degree are gold and silver. For that very reason they have been
chosen by common consent for use as money, to represent the value of other things: the
world market for them is most highly organized, and will be found to offer many subtle
illustrations of the actions of the laws which we are now discussing.
5. At the opposite extremity to international stock exchange securities and the more
valuable metals are, firstly, things which must be made to order to suit particular
individuals, ... and, secondly, perishable and bulky goods, ... The first can scarcely be
said to have a wholesale market at all; the conditions by which their price is determined
are those of retail buying and selling, and the study of them may be postponed. (6*)
There are indeed wholesale markets for the second class, but they are confined within
narrow boundaries; we may find our typical instance in the sale of the commoner kinds of
vegetables in a country town. The market-gardeners in the neighbourhood have probably
to arrange for the sale of their vegetables to the townspeople with but little external
interference on either side. There may be some check to extreme prices by the power on
the one side of selling, and on the other of buying elsewhere; but under ordinary
circumstances the check is inoperative, and it may happen that the dealers in such a case
are able to combine, and thus fix an artificial monopoly price; that is, a price determined
with little direct reference to cost of production, but chiefly by a consideration of what
the market will bear.
On the other hand, it may happen that some of the market-gardeners are almost equally
near a second country town, and send their vegetables now to one and now to the other;
and some people who occasionally buy in the first town may have equally good access to
the second. The least variation in price will lead them to prefer the better market; and
thus make the bargainings in the two towns to some extent mutually dependent. ... As
news passes from mouth to mouth till a rumour spreads far away from its forgotten
sources, so even the most secluded market is liable to be influenced by changes of which
those in the market have no direct cognizance, changes that have had their origin far
away and have spread gradually from market to market.
Thus at the one extreme are world markets in which competition acts directly from all
parts of the globe; and at the other those secluded markets in which all direct competition
from afar is shut out, though indirect and transmitted competition may make itself felt
even in these; and about midway between these extremes lie the great majority of the
markets which the economist and the business man have to study.
6. Again, markets vary with regard to the period of time which is allowed to the forces of
demand and supply to bring themselves into equilibrium with one another, as well as with
regard to the area over which they extend. And this element of Time requires more
careful attention just now than does that of Space. For the nature of the equilibrium itself,
and that of the causes by which it is determined, depend on the length of the period over
which the market is taken to extend. We shall find that if the period is short, the supply is
limited to the stores which happen to be at hand: if the period is longer, the supply will be
influenced, more or less, by the cost of producing the commodity in question; and if the
period is very long, this cost will in its turn be influenced, more or less, by the cost of
producing the labour and the material things required for producing the commodity.
These three classes of course merge into one another by imperceptible degrees. ...
NOTES:
1. Recherches sur les Principes Mathématiques de la Théorie des Richesses, ch. IV.
2. Theory of Political Economy, ch. IV.
3. (deleted)
4. Thus the managers of a public or private "elevator," receive grain from a farmer, divide
it into different grades, and return to him certificates for as many bushels of each grade as
he has delivered. His grain is then mixed with those of other farmers; his certificates are
likely to change hands several times before they reach a purchaser who demands that the
grain shall be actually delivered to him; and little or none of what that purchaser receives
may have come from the farm of the original recipient of the certificate.
5. In the case of shares of very small and little known companies, the difference between
the price at which a dealer is willing to buy and that at which he will sell may amount to
from five per cent. or more of the selling value. If he buys, he may have to carry this
security a long time before he meets with any one who comes to take it from him, and
meanwhile it may fall in value: while if he undertakes to deliver a security which he has
not himself got and which does not come on the market every day, he may be unable to
complete his contract without much trouble and expense.
6. A man may not trouble himself much about small retail purchases: he may give half-acrown for a packet of paper in one shop which he could have got for two shillings in
another. But it is otherwise with wholesale prices. A manufacturer cannot sell a ream of
paper for six shillings while his neighbour is selling it at five. For those whose business it
is to deal in paper know almost exactly the lowest price at which it can be bought, and
will not pay more than this. The manufacturer has to sell at about the market price, that is
at about the price at which other manufacturers are selling at the same time.