A market is composed of the buyers and sellers that trade in it. But who, exactly, are these buyers and sellers?
When you think of a seller, your first image might be of a business. Indeed, in many markets, you'd be right: The sellers are business firms. Examples are markets for restaurant meals, airline travel, clothing, banking services, and video rentals. But businesses aren't the only sellers in the economy. In many markets, households are important sellers. For example, households are the primary sellers in labor markets, such as the markets for Web page designers, for accountants, and for factory workers. Households are also important sellers in markets for used cars, residential homes, and rare artworks. Governments, too, are sometimes important sellers. For example, state governments are major sellers in the market for education through state universities (such as the University of California, the University of Minnesota, and St. Louis Community College).
What about the other side of the market? When you think of buyers, your first thought may be "people" like yourself, or "households." Indeed, many goods and services are bought primarily by households: college education, movies, housing, clothing, and so on. But here, too, the stereotype doesn't always fit. In labor markets, businesses and government agencies are the primary buyers. Businesses and government are also important buyers of personal computers, automobiles, and airline transportation.
As you can see, the buyers in a market can be households, business firms, or government agencies. And the same is true of sellers. Sometimes, it's important to recognize that all three groups are on both sides of a market. But not always. Once again, it depends on our purpose.
When the purpose is largely educational, greater simplification is permitted. For example, to understand how the price of paperback books is determined, we would in most cases assume that households are the only buyers. True, business firms and government libraries also buy paperback books. But including these buyers would only complicate our model, without changing any of our conclusions about price. On the other hand, if we wanted to precisely forecast the revenues of booksellers from paperback books, it would be dangerous to ignore orders from businesses and government libraries.
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