The Market mechanism is not as simple as it looks. It raises many questions, and gives food for thought.
We assume that there is freedom in decision-making. Therefore there is a strong link to democracy.
Markets are defined by geographical size, number of players who have access, types of access restrictions.
Ideal markets require transparency of information flow, control of insider knowledge, open access, and so on. Competing on elastic markets with open competition and many suppliers does not generate much profit.
We can look at the Market mechanism as an empirical model of how prices develop over time, but it is also used as a normative framework. In order to create market efficiency, much external reinforcement and oversight is necessary, because the mechanism does not reward actors to play "fairly", but rather encourages them to find ways to get an advantage. Actors with privileged positions in the market will make more money: through branding, formation of monopolies, copyrights, subsidies, tax incentives, or other advantages like insider information, or advanced knowledge of market trends.
The demand and supply model is somewhat misleading, because it just describes an ideal situation for one single market (one product.) In establishing a price for one item, we assume that the prices of all other goods and services in the economy are constant. But if those prices fluctuate, the demand and supply curves of X become different, which means that the equilibrium price is dependent on other factors. But all other prices depend on demand and supply in their own respective markets. In reality there are many markets which influence each other; they are interlocking and interdependent. Economy, as the study of markets, needs to have a systemic approach. Market participants, on the other hand, just want to know the prices for specific services and products.
Since there is never only one market, but many interlocking markets, we deal with an open market system. This aggregate of all markets creates a complex system. A system is complex if its agents meet four criteria:diversity, connection, interdependence, and adaptation. There should be diversity among the agents, but the agents need to be connected. This means that they react to each other and learn from each other, which makes their actions interdependent. They adapt to the environment as well as to each other. (Find out more about complex systems here.)
The number of suppliers defines the spectrum of competition.
Markets "spread," they morph, evolve, differentiate, and change through product differentiation, innovation, or other company activities like branding, copyrights, customer service support, warranty or financing conditions. Markets can also become platforms for new markets, for instance in smartphones, TV's, computers, cars.
Markets as casinos: how do you distinguish between the operation of a market and speculation - acting on a perceived future?
Market bubbles. In theory, markets should move towards equilibrium. In practice, they are sometimes determined by crowd behavior - prices go up, more people buy because they go up, eventually it crashes. Manipulation by distorting the rules.
The price can be interpreted as information. (Signals to suppliers and consumers.) Is the price a clear reflection of all available information? Is it all the players need to know? The Efficient Market hypothesis (EMH) is an economic theory that claims that market prices fully incorporate information that is known now and that new information is incorporated very quickly into market prices.
Profits can be dramatically increased through market manipulation. So why should players be fair? Is there not in implicit conflict between profits and ethics? Is it true that ethical behavior also coincides with better business, and more profit?
If the EMH is correct, why do we need additional constraints in the form of business ethics on managers, workers, and consumers, in order to improves markets?
Is the behavior of participants only based real demand? What is demand, and how do we distinguish it from desire (or fear) that can also drive decisions? (addictions, gambling, stock market, medications, drugs,)
How do we take negative externalities into account when thinking about the optimal equilibrium price and quantity
Tragedy of the Commons: public goods get destroyed through over-use, because benefits of using common property goes to individual players.