The concept of transactions leads to the concept of a market. A market is the set of actual and potential buyers of a product.
To understand the nature of a market, visualize a primitive economy consisting of four residents: a fisherman, a hunter, a potter, and a farmer. These skilled trades people can interact in different ways to meet their needs.
In a self-sufficiency representation, they gather the needed goods for themselves. Thus the hunter spends most of the available time hunting, but also has to take time to fish, make pottery, and farm to obtain the other goods. The hunter is less efficient at hunting, and the same is true of the other trades people.
In a decentralized exchange model, each person values the other three as potential “customers” who are apart of a market. The hunter then may make separate excursions to trade goods with each of the fisherman, the potter, and the farmer to exchange meat for their goods.
In a centralized exchange model, a new person is required. This person is called a merchant who locates in a central area called a marketplace. Each skilled tradesperson brings goods to the merchant and trades for other needed goods. Thus the hunter transacts with one “market” to obtain all the needed goods, rather than individually with three other persons.
The merchant substantially reduces the number of required transactions required to achieve a given volume of exchange. In other words, merchants and central marketplaces increase the transactional efficiency of the local economy.
As the number of persons and transaction increases in a societal group, the number of merchants and marketplaces also increases. In advanced societies, markets need not be physical places where buyers and sellers interact. With modern electronic communication, banking and transportation, a merchant can advertise a product on late evening television, take orders from hundreds of customers over the phone, and ship the goods to the buyers on the following day without having had any physical contact with the buyers.
A market can develop around a product, a service, or anything else of value. For example, a labor market consisting of individuals who are willing to offer their time and skill in return for wages or products. Various institutions will develop around a labor market to assist its functioning, such as temporary employment agencies and career placement firms. The money market is another important market that emerges to meet the needs of people so that they can borrow, lend, save, and safeguard money. And the donor market emerges to meet the financial needs of nonprofit organizations.
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