Markets for Managers: A Managerial Economics Primer

CHAPTER 3 Market Exchange

‘The market is a democratic institution aggregating the decisions of whoever participates in it. When all is said and done, complaints about the market are nothing but complaints about the people themselves.’

—Paul Piccone¹

In 2010 there were around 7000 people in the UK who needed a kidney transplant. Given that healthy adults only require one functioning kidney, this means that the potential supply is almost 38 million.² And yet less than 3000 operations were performed. This shortage means that around 1 in 10 of those needing a kidney will die before they get one. For those who need any organ transplant, three people die every day. To an economist the answer is simple: have a market. For many people, the idea is repugnant. But at what cost? How many lives are you willing to sacrifice to avoid feeling icky? Maybe it isn't a coincidence that the only country in the world to have a legalised market in kidney transplants is also the only country in the world that doesn't have a shortage?

Having discussed the concepts of demand and supply, the purpose of this chapter is to see how markets can bring them together. A ‘market’ as an institution through which buyers and sellers meet to trade goods and services. Historically, a market would be a physical place – usually close to ports or other transport hubs. This explains why geography has played an important role in how trade routes have developed. But markets can also be a virtual place, as modern technology ...