The importance of the market to business - Business Environment

All firms operate in markets, whether they are localized, national or international. Although firms might be able to influence the market conditions that face them, they need a knowledge of their own markets and how markets fit together in the market economy. Firms often have a range of products and they need to be aware of the differing conditions in each of their markets. They need a knowledge of the shape and position of the demand curve they face, including knowledge of the following aspects:

  • The nature of the good they produce.
  • The way in which it is viewed by consumers.
  • The factors which affect the demand for their good.
  • Any changes likely in the future which will affect the market.
  • Any likely government intervention in the market.

Only through this information can the firm hope to retain markets, expand existing markets and move into new ones.An understanding is also needed of the concept of elasticity of demand.Knowing how the demand for its product responds to changes in its price will help the firm in its pricing policy. Measures of income elasticity help the firm in forecasting the effects of changes in income on the demand for its products. Economic growth will affect markets with high income elasticities much more than markets with low income elasticities. This knowledge will also help the firm in developing its marketing strategy. For example, goods with low income elasticities could be marketed as ‘economical’, thus hopefully increasing the market share.If the firm wishes to be successful in existing markets and to expand into new markets, as well as detailed knowledge of demand conditions, it also needs to know about its own supply curve and production process and the supply curves of other firms.Although the economy in which the firm operates is not a totally free market economy the firm needs to know and understand the importance of market forces which form the basis of our economic system. Changes in market forces can have dramatic effects, not only on the affected market but also on other related markets and the wider economy. Changes in one market will affect all other markets to a greater or lesser degree.

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