Markets in the financial system

People have different needs, and in trying to fulfill these needs, opposite needs are matched. Where needs are matched on a large scale, markets for those needs develop. Market forces are thus:

the supply of an item or service where there is a demand for that item or service.
Trading of that item or service is created through a price mechanism. The price is based on the value of the item or service to the traders (buyers and sellers), depending on certain market factors. There are different markets in a system, such as the services market the products market the financial markets.

A market is not necessarily a physical and geographically identifiable place, and goods traded are not necessarily physical goods. Trading might take place over the telephone, and goods traded might be knowledge, etc. Goods traded in markets are traded through a price mechanism which expresses the interaction of demand for and supply of these goods as a value. So, for instance, the trading of apples uses the price mechanism of a monetary amount, for example R1,20 per apple.

The different markets in the financial system of a country are not isolated markets, but they interact with each other. With electronic communication and the revolution in computers and computer networks, the markets of the world are busy interacting on a large scale. In a small country like South Africa, one could sometimes feel lost in this “universe” of supplies and demands. As astronomer Bernard de Fontenelle (1657-1757) put it: “Behold a universe so immense, I am lost in it. I no longer know where I am.”

The effect of different markets on each other can, however, clearly be seen in the South African context. The money supply in South Africa is, inter alia, influenced by the gold price, because South Africa is a net exporter (seller) of gold. If the gold price should increase, the supply of money in the markets will increase due to more money flowing into the country. This could lead to a higher demand for products in the product markets because of the availability of money. A higher demand for products could result in prices of products going up (resulting in inflation), which would dampen the demand for products and money. This interactive circle of changes is an ongoing process in markets.