Supply And Demand - Chapter 3 Page 2
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37Chapter 3: Supply and Demand
53
In ordinary language, a market is a specific location where buying and selling
take place: a supermarket, a flea market, and so on. In economics, a market is not
a place, but rather a collection of traders. More specifically,
a market is a group of buyers and sellers with the potential to trade with
each other.
Economists think of the economy as a collection of markets. In each of these mar-
kets, the collection of buyers and sellers will be different, depending on what is
being traded. There is a market for oranges, another for automobiles, another for
real estate, and still others for corporate stocks, labor services, land, euros, and any-
thing else that is bought and sold.
However, unlike chemistry—in which the set of basic elements is always the
same—in economics, we can define a market in different ways, depending on our
purpose. In fact, in almost any economic analysis, the first step is to define and char-
acterize the market or collection of markets to analyze.
H
B
S
W
D
M
?
OW
ROADLY
HOULD
E
EFINE THE
ARKET
Suppose we want to study the personal computer industry in the United States.
Should we define the market very broadly (“the market for computers”), or very
narrowly (“the market for ultra-light laptops”), or something in between (“the
market for laptops”)? The right choice depends on the problem we’re trying to
analyze.
For example, if we’re interested in why computers in general have come down
in price over the past decade, there would be no reason to divide computers into
desktops and laptops. Such a distinction would only get in the way. Thus, we’d treat
all types of computers as if they were the same good. Economists call this process
aggregation—combining a group of distinct things into a single whole.
Aggregation
The process of
But suppose we’re asking a different question: Why do laptops always cost more
combining distinct things into
a single whole.
than desktops with similar computing power? Then we’d aggregate all laptops
together as one good, and all desktops as another, and look at each of these more
narrowly defined markets.
The same general principle applies to the geographic breadth of the market.
If we want to predict how instability in the Persian Gulf will affect gasoline prices
around the world, we’d use the “global market for oil,” in which the major oil pro-
ducers in about 20 countries sell to buyers around the globe. But if we want to
explain why gasoline is cheaper in the United States than in most of the rest of the
world, we’d want to look at the “U.S. market for oil.” In this market, global sellers
choose how much oil to sell to U.S. buyers.
In economics, markets can be defined broadly or narrowly, depending on
our purpose.
How broadly or narrowly markets are defined is one of the most important
differences between macroeconomics and microeconomics. In macroeconomics,
goods and services are aggregated to the highest levels. Macro models even lump all
consumer goods—breakfast cereals, cell phones, blue jeans, and so forth—into the
single category “consumption goods” and view them as if they are traded in a sin-
gle, broadly defined market, “the market for consumption goods.” Similarly, instead
of recognizing different markets for shovels, bulldozers, computers, and factory
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