Lecture notes on Marketing management

lecture notes on fundamentals of marketing and lecture notes for principles of marketing and what relationship marketing is and why it is important pdf free download
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Published Date:12-07-2017
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CONTENTS UNIT – I Lesson 1.1 Introduction to marketing Lesson 1.2 Marketing concepts Lesson 1.3 Marketing process Lesson 1.4 Marketing environment Lesson 1.5 Buyer Behaviour Lesson 1.6 Market segmentation, targeting and positioning Lesson 1.7 Introduction to marketing mix Answer key Glossary of terms References 1 Unit – I Lesson 1.1 Introduction to Marketing Objectives In this lesson, we will introduce you to the business function of marketing. After you work out this lesson, you should be able to:  Define marketing and the utility (value) it creates for the customer  Trace the origin of marketing and explain how it has evolved  Describe the elements of a marketing strategy  Understand the scope of marketing In this lesson, we will discuss the following:  What is marketing?  Evolution of marketing  Marketing framework  Extending the traditional boundaries of marketing  Functions of marketing Introduction Production and marketing of goods and services are the essence of economic life in any society. All organizations perform these two basic functions to satisfy their commitments to their stakeholders – the owners, the customers and the society, at large. They create a benefit that economists call utility which is the want-satisfying power of a good or service. There are four basic kinds of utility – form, time, place and ownership utility. Form utility is created when the firm converts raw materials and component inputs into finished goods and services. Although marketing provides important inputs that specify consumer preference, the organization’s production function is responsible for the actual creation of form utility. Marketing function creates time, place and ownership utilities. Time and place utility occur when consumers find goods and services available when and where they want to purchase them. Online retailers with 247 format emphasize time utility. Vending machines focus on providing place utility for people buying snacks and soft drinks. The transfer of title to goods or services at the time of purchase creates ownership utility. 2 Type Description Examples Responsible function Form Conversion of raw Pizza made from Production materials and several ingredients components into finished goods and services Time Availability of goods and Dial-a-pizza; Marketing services when consumers delivery guaranteed want them in 30 min. Place Availability of goods and Delivery at your Marketing services where doorstep consumers want them Ownership Ability to transfer title to Pizza sales (in Marketing (possession) goods or services from exchange for rupees marketer to buyer or credit card payment) To survive, all organizations must create utility. Designing and marketing want- satisfying goods, services and ideas is the foundation for the creation of utility. Management guru, Peter F.Drucker emphasized the importance of marketing in his classic book, The Practice of Management as: ‘If we want to know what a business is, we have start with its purpose. And its purpose must lie outside the business itself. In fact, it must lie in society since a business enterprise is an organ of society. There is one valid definition of business purpose: to create a customer’. How does an organization create a customer? Guiltinan and Paul explain it this way: Essentially, ‘creating’ a customer means identifying needs in the marketplace, finding out which needs the organization can profitably serve and developing an offering to convert potential buyers into customers. Marketing managers are responsible for most of the activities necessary to create the customers the organization wants, These activities include:  Identifying customer needs  Designing goods and services that meet those needs  Communication information about those goods and services to prospective buyers 3  Making the goods and services available at times and places that meet customers’ needs  Pricing goods and services to reflect costs, competition and customers’ ability to buy  Providing for the necessary service and follow-up to ensure customer satisfaction after the purchase Activity 1.1.1 Think of a recent purchase you made. How did the company provide you with the following utilities? Form _________________________ _________________________ Time _________________________ _________________________ Place _________________________ _________________________ Ownership _________________________ _________________________ What is Marketing? Continuous exposure to advertising and personal selling leads many people to link marketing and selling, or to think that marketing activities start once goods and services have been produced. While marketing certainly includes selling and advertising, it encompasses much more. Marketing also involves analyzing consumer needs, securing information needed to design and produce goods or services that match buyer expectations and creating and maintaining relationships with customers and suppliers. The following table summarizes the key differences between marketing and selling concepts. 4 Table 1.1.1 Selling Vs. Marketing Point of difference Selling Marketing Starting point Factory Marketplace Focus Existing products Customer needs Means Selling and promoting Integrated marketing End Profits through volume Profits through satisfaction The difference between selling and marketing can be best illustrated by this popular customer quote: ‘Don’t tell me how good your product is, but tell me how good it will make me’. The American Marketing Association, the official organization for academic and professional marketers, defines marketing as: Marketing is the process of planning and executing the conception, pricing, promotion and distribution of ideas, goods and services to create exchanges that satisfy individual and organizational objectives Another definition goes as ‘ … process by which individuals and groups obtain what they need and want through creating and exchanging products and value with others’. Simply put: Marketing is the delivery of customer satisfaction at a profit. The notion of exchange as central to marketing is reinforced by many contemporary definitions such as ‘marketing is the process of creating and resolving exchange relationships’ and ‘marketing is the process in which exchanges occur among persons and social groups’. The essence of marketing is the exchange process, in which two or more parties give something of value to each other to satisfy felt needs. In many exchanges, people trade tangible goods for money. In others, they trade intangible services. Exchanges in marketing are consummated not just between any two parties, but almost always among two or more parties, of which one or more taken on the role of buyer and one or more, the role of seller. A common set of conditions are present in the marketplace, viz., 1) Buyers outnumber sellers 2) Any individual buyer is weaker than any individual seller economically, but 5 3) The total economic power of even a fraction of the buyers is enough to assure the existence of, or to put out of business, most sellers or groups of sellers, and 4) Consequently, the sellers compete to sway the largest number of buyers they can to their, rather than another seller’s (competitor’s) offerings. Finally and intriguingly, 5) The sellers in their attempt to meet competition and attract the largest number of buyers, are influenced as well, regularly modifying their behaviours so they will have more success, with more buyers, over time. The expanded concept of marketing activities permeates all organizational functions. It assumes that the marketing effort will follow the overall corporate strategy and will proceed in accordance with ethical practices and that it will effectively serve the interests of both society and organization. The concept also identifies the marketing variables – product, price, promotion and distribution – that combine to provide customer satisfaction. In addition, it assumes that the organization begins by identifying and analyzing the consumer segments that it will later satisfy through its production and marketing activities. The concept’s emphasis on creating and maintaining relationships is consistent with the focus in business on long-term, mutually satisfying sales, purchases and other interactions with customers and suppliers. Finally it recognizes that marketing concepts and techniques apply to non-profit organizations as well as to profit-oriented businesses, to product organization and to service organizations, to domestic and global organizations, as well as to organizations targeting consumers and other businesses. Activity 1.1.2 The following list consists of some MARKETING MYTHS. Tick the myths you thought about marketing before reading this section? Add some new myths you might have discovered.  Marketing and selling are synonymous  The job of marketing is to develop good advertisements  Marketing is pushing the product to the customers  Marketing is transaction-oriented than relationship-oriented  Marketing is a short-term business strategy  Marketing is an independent function of a business  Marketing is part of selling 6 Evolution Of Marketing As noted earlier, exchange is the origin of marketing activity. When people need to exchange goods, they naturally begin a marketing effort. Wroe Alderson, a leading marketing theorist has pointed out, ‘It seems altogether reasonable to describe the development of exchange as a great invention which helped to start primitive man on the road to civilization’. Production is not meaningful until a system of marketing has been established. An adage goes as: Nothing happens until somebody sells something. Although marketing has always been a part of business, its importance has varied greatly over the years. The following table identifies five eras in the history of marketing: the production era, the product era, the sales era, the marketing era and the relationship marketing era. Table 1.1.2 The Evolution Of Marketing Era Prevailing attitude and approach Production  Consumers favor products that are available and highly affordable  Improve production and distribution  ‘Availability and affordability is what the customer wants’ Product  Consumers favor products that offer the most quality, performance and innovative features  ‘A good product will sell itself’ Sales  Consumers will buy products only if the company promotes/ sells these products  ‘Creative advertising and selling will overcome consumers’ resistance and convince them to buy’ Marketing  Focuses on needs/ wants of target markets and delivering satisfaction better than competitors  ‘The consumer is king Find a need and fill it’ Relationship marketing  Focuses on needs/ wants of target markets and delivering superior value  ‘Long-term relationships with customers and other partners lead to success’ In the production era, the production orientation dominated business philosophy. Indeed business success was often defined solely in terms of production victories. The focus was on production and distribution efficiency. The drive to achieve economies of 7 scale was dominant. The goal was to make the product affordable and available to the buyers. In the product era, the goal was to build a better mouse trap and it was assumed that buyers will flock the seller who does it. However, a better mousetrap is no guarantee of success and marketing history is full of miserable failures despite better mousetrap designs. Inventing the greatest new product is not enough. That product must also solve a perceived marketplace need. Otherwise, even the best-engineered. Highest quality product will fail. In the sales era, firms attempted to match their output to the potential number of customers who would want it. Firms assumed that customers will resist purchasing goods and services not deemed essential and that the task of selling and advertising is to convince them to buy. But selling is only one component of marketing. Next came the marketing era during which the company focus shifted from products and sales to customers’ needs. The marketing concept, a crucial change in management philosophy, can be explained best by the shift from a seller’s market – one with a shortage of goods and services – to a buyer’s market – one with an abundance of goods and services. The advent of a strong buyer’s market created the need for a customer orientation. Companies had to market goods and services, not just produce them. This realization has been identified as the emergence of the marketing concept. The keyword is customer orientation. All facets of the organization must contribute first to assessing and then to satisfying customer needs and wants. The relationship marketing era is a more recent one. Organization’s carried the marketing era’s customer orientation one step further by focusing on establishing and maintaining relationships with both customers and suppliers. This effort represented a major shift from the traditional concept of marketing as a simple exchange between buyer and seller. Relationship marketing, by contrast, involves long-term, value-added relationships developed over time with customers and suppliers. The following table summarizes the differences between transaction marketing (i.e. exchanges characterized by limited communications and little or no on going relationship between the parties) and relationship marketing. 8 Table 1.1.3 Comparing transaction-based marketing and relationship marketing Characteristic Transaction-Based Relationship Marketing Marketing Time orientation Short term Long term Organizational goal Make the sale Emphasis on customer retention Customer service Relatively low Key component priority Customer contact Low to moderate Frequent Degree of customer Low High commitment Basis for seller- Conflict manipulation Cooperation; trust customer interactions Source of quality Primarily from Companywide production commitment Activity 1.1.3 Make a statement to describe each of the stages in the evolution of marketing. You may consider the given examples before coming up with your own statements. 1. Production era a. ‘Cut costs. Profits will take care of themselves’ 2. Product era a. ‘A good product will sell itself’ 3. Sales era a. ‘Selling is laying the bait for the customer’ 4. Marketing era a. ‘The customer is King’ 5. Relationship marketing era a. ‘Relationship with customers determine our firm’s future’ Marketing Framework The basic elements of a marketing strategy consist of (1) the target market, and (2) the marketing mix variables of product, price, place and promotion that combine to satisfy the needs of the target market. The outer circle in Figure 1.1.1 lists environmental characteristics that provide the framework within which marketing strategies are planned. 9 Figure 1.1.1 Elements of a marketing strategy and its environmental framework Marketing activities focus on the consumer. Therefore, a market-driven organization begins its overall strategy with a detailed description of its target market: the group of people toward whom the firm decides to direct its marketing efforts. After marketers select a target market, they direct their activities towards profitably satisfying that target segment. Although they must manipulate many variables to reach this goal, marketing decision making can be divided into four areas: product, price, place (distribution) and promotion (marketing communication). These 4 Ps of marketing are referred to as the marketing mix. The 4 Ps blend to fit the needs and preferences of a specific target market. These are the four variables that a marketer can use and control in different combinations to create value for customers. Figure 1.1.1 illustrates the focus of the marketing mix variables on the central choice of consumer or organizational target markets. In addition, decisions about the 4 Ps are affected by the environmental factors in the outer circle of that figure. Unlike the controllable marketing mix elements, the environmental variables frequently lie outside the control of marketers. 10 The product strategy involves deciding what goods and services the firm should offer to a group of consumers and also making decisions about customer service, brand name, packaging, labeling, product life cycles and new product development. The pricing strategy deals with the methods of setting profitable and justifiable prices. Marketers develop place (distribution) strategy to ensure that consumers find their products available in the proper quantities at the right times and places. Place-related decisions involve the distribution functions and marketing intermediaries (channel members). In the promotional strategy, marketers blend together the various elements of promotion to communicate most effectively with their target market. Many firms use an approach called Integrate Marketing Communications (IMC) to coordinate all promotional activities so that the consumer receives a unified, consistent and effective message. Marketers do not make decisions about target markets and marketing mix variables in a vacuum. They must take into account the dynamic nature of the five marketing environmental dimensions as shown in Figure 1.1.1 – competitive, political- legal, economic, technological and social-cultural dimensions. Marketers compete for the same consumers. So the developments in the competitive environment will have lot of repercussions. The political-legal environment includes the governing and regulatory bodies who impose guidelines to the marketers. Adherence to the law of the land is an imperative for a marketer to be a good and responsible corporate citizen. The economic environment dictates the mood in the target market who take decisions such as to buy or save, to buy now or later. The technological environment can spell life or death for a marketer with break-through technologies. Marketers often leap forward or get left behind owing to the changes in the technological environment. The social-cultural environment offers cues for the marketers to ‘connect’ well with the target market. Failure on part of the marketer to understand the social-cultural environment will have serious consequences. A marketers can not afford to rub a society/culture on the wrong side 11Extending the Traditional Boundaries of Marketing Until fairly recently, marketing focused primarily on exchanges of goods between individuals (business-to-consumer (B2C) marketing) and businesses (business-to- business (B2B) marketing). Industrial marketing deals with the organizational purchases of goods to support production of other goods or daily operations or for resale. Table 1.1.2 highlights the differences between consumer marketing and industrial marketing. Table 1.1.2 Differences between Industrial and Consumer Marketing Areas of Industrial Markets Consumer Markets Difference (B2B) (B2C) Market  Geographically concentrated  Geographically dispersed characteristics  Relatively fewer buyers  Mass markets Product  Technical complexity  Standardized products characteristics  Customized products Service  Service, timely delivery and  Service, timely delivery characteristics availability are critical and availability are somewhat important Buyer  Involvement of cross- Involvement of family behaviour functional teams in both members buyer and supplier firms  Purchase decisions are  Purchase decisions are mainly made on mostly made on rational/performance basis physiological/social/  Technical expertise sought psychological needs  Stable interpersonal  Less technical expertise relationship between buyer  Non-personal relationship and seller Channel  More direct channels  Indirect channels characteristics  Fewer intermediaries/  Multiple layers of middlemen intermediaries Promotional  Emphasis on personal selling  Emphasis on advertising characteristics Price  Competitive bidding and  List prices or maximum characteristics negotiated prices retail price (MRP)  List prices for standard products 12 With the growth of the services sector, marketers realized that services cannot be marketed in the same way as the products. Certain characteristics of services posed serious problems for marketers who realized that services marketing must be done differently and not with the same marketing mix (4 Ps) variables. Service characteristics like intangibility (service firms don’t sell a tangible thing, but a promise) inseparability (production and consumption of services take place at about the same time), heterogeneity (the problem due to the fact that no two service providers are like, nor are the service consumers) and perishability (service providers cannot maintain inventories of their products). To cope with these challenges, service marketers suggest additional 3 Ps – process, physical evidence and people. The process is aimed at solving the heterogeneity or variability problem associated with the services by providing a service blueprint. The physical evidence solves some of the problems associated with the intangible nature of services. The physical evidence in terms of service environment, equipment, personnel and so on attempts to tangibilize the intangible. The final P – People – gives lot of attention to the service providers because they are, strictly speaking, part of the service provided. They can influence the perceived service quality in a big way. With the world becoming a global village, marketers started targeting global audience for their products and services. International marketers implement the basic marketing framework discussed earlier. However transactions that cross national boundaries encounter an additional set of environmental factors. For example, differences in laws, economic conditions, cultural and business norms and consumer preferences other demand variations in marketing strategies. The biggest challenge in international marketing is managing the international business environment. With many uncontrollable factors, sharing complex relationships among them, the international marketer faces the dilemma of whether to standardize or differentiate his marketing mix. Non-profit organizations encounter a special set of characteristics that influence their marketing activities. Like for-profit firms, non-profit firms may market tangible goods and/or intangible services and operate in B2C and B2B markets. An important distinction is that profit-seeking businesses tend to focus their marketing on just one 13public – their customers. Non-profit businesses however must often market to multiple publics (say, their clients and sponsors), which complicates decision making regarding the markets to target. Also a customer or service user may wield less control over the organization’s destiny than would be true for customers of a profit-seeking firm. As a result, non-profit marketing must fine tune its marketing variables to adjust to these conditions. Activity 1.1.4 Match the following: (1) Product marketing - (A) AIDS awareness campaign (2) Service marketing - (B) Selling iron ore to a steel manufacturer (3) Consumer marketing - (C) Selling ice creams to adults (4) Industrial marketing - (D) Disney setting up a park in Hong Kong (5) International marketing - (E) Setting up an ayurvedic massage center (6) Non-profit marketing - (F) Selling electric bulbs Functions of Marketing Firms must spend money to create time, place and ownership utilities as discussed earlier. Several studies have been made to measure marketing costs in relation to overall product costs and service costs and most estimates have ranged between 40-60 percent. These costs are not associated with raw materials or any of the other production functions necessary for creating form utility. What then does the consumer receive in return for this proportion of marketing cost? This question is answered by understanding the functions performed by marketing. In the following table, marketing is responsible for the performance of 8 universal functions: buying, selling, transporting, storing, standardizing and grading, financing, risk taking and securing marketing information. Some functions are performed by manufacturers, others by marketing intermediaries like wholesalers and retailers. Buying and selling, the first two functions represent exchange functions. Transporting and storing are physical distribution functions. The final four marketing functions – standardizing and grading, financing, risk taking and securing market information – are often called facilitating functions because they assist the marketer in performing the exchange and physical distribution functions. 14 Table 1.1.3 Functions of Marketing Marketing function Description A. Exchange functions 1. Buying Ensuring that product offerings are available in sufficient quantities to meet customer demands 2. Selling Using advertising, personal selling and sales promotion to match goods and services to customer needs B. Physical distribution functions 3. Transporting Moving products from their points of production to locations convenient for purchasers 4. Storing Warehousing products until needed for sale C. Facilitating functions 5. Standardizing and grading Ensuring that product offerings meet established quality and quantity control standards of size, weight and so on 6. Financing Providing credit for channel members or consumers 7. Risk taking Dealing with uncertainty about consumer purchases resulting from creation and marketing of goods and services that consumers may purchase in the future 8. Securing marketing information Collecting information about consumers, competitors and channel members for use in marketing decision making Case Study: Master of the Online Supermall (excerpt from Business Today, May 2004) Amazon.com could well go down in history as a love child born of the heady fling that the stockmarket had with dotcoms in the late 1990s. But the company, founded by Jeff Bezos in July 1995 when the internet was still an untested business medium, is a survivor-par-excellence. It floundered a bit in the swirl of the dotcom bust, but unlike thousands that were swept away, Amazon.com reinvented itself and emerged stronger. The 40-year old Bezos, a computer science grad from Princeton University, is the pioneer of Internet Retailing. His compelling vision introduced a new paradigm for retail, the click-and-buy model; buy goods from a website instead of a physical store, from 15wherever there is an internet connection: home, office or cyber-café. A model that gave convenience to buyers, and mind-boggling market reach to sellers. Named after the mighty Amazon river and its numerous tributaries that surge through dense rain forests, Amazon.com was started with an initial investment of a few thousand dollars. In less than three weeks after the website went live, Bezos and his wife Mackenzie were pulling in sales of over 20,000 a week. And soon after going public in 1997, the company had a market capitalization higher than that of its brick-and-mortar rivals. In 1999, Bezos was chosen as Time Magazine’s ‘Person of the Year’. But things changed soon after and the dotcom bust saw Amazon.com lose almost 90 percent of its market cap in 2000. Bezos didn’t give up on his vision. He set about transforming Amazon.com from a website selling books into something much bigger: the world’s largest online retailing platform. A series of tie-ups with companies like Toys R Us and Target helped give the website the feel of an online supermall where a customer could buy almost anything. Marketing initiatives followed – from free shipping to highly discounted prices to very customized offerings (based on customer profile) to wide distribution through sites which can divert traffic to Amazon.com for a small commission. But the biggest move was Bezos’ decision to make the site ‘more global’. The moves have paid off. The company announced its first full-year profit in 2003. It has been making money now for three straight quarters and revenues have exceeded a billion dollars for the last six quarters. If proof was needed that there is money to be made in online retailing, this is it. And Bezos has proved that the right idea, coupled with perseverance, pays in the end. Questions: How does Amazon.com bring utility or create value for its customers? Explain the marketing framework of Amazon.com? What do you learn about marketing from the Amazon story? 16 Unit – I Lesson - 1.2 Marketing Concepts Objectives In this lesson, we will introduce you to the conceptual ideas that makeup the marketing function of a business. After you work out this lesson, you should be able to:  List out the concepts of marketing  Understand how these concepts are interconnected  Explain how marketing is changing in a connected world In this lesson, we will discuss the following:  Needs, wants and demands  Products  Value and satisfaction  Exchange, transactions and relationships  Markets  Marketing in a connected world Introduction Having defined marketing in the previous lesson as a social and managerial process by which individuals and groups obtain what they need and want through creating and exchanging products and value with others, this lesson examines the important concepts that are included and implied in this definition. These concepts are indicated in Figure 1.2.1 and it is important to note that they are linked, with each one building on the one before it. 17 Figure 1.2.1 Marketing concepts Needs, Wants and Demands The most basic concept underlying marketing is that of human needs. A need is a state of felt deprivation. It is a part of the human makeup. Humans have many needs, viz., physical needs, social needs, spiritual needs and so on. Wants are the form taken by needs as they are shaped by the one’s culture and personality. Wants are thus shaped by both the internal and external factors. Wants are described in terms of objects that will satisfy needs. For example, thirst is a need. To quench this thirst, a person may consider a number of options – drink water or a soft drink or a fruit juice. These objects (which represent the different choices for a person to fulfill his/her need) comprise the potential want-list. As people are exposed to more objects that arouse their interest and desire, marketers try to provide more choices, that is, more want-satisfying products. People have almost unlimited wants but limited resources. Therefore, they want to choose products that provide the most satisfaction for their money. When backed by buying power (ability), a want becomes a demand. 18Products A product is anything that can be offered to a market to satisfy a need or want. People satisfy their needs and wants with products. Though the word suggests a physical object, the concept of product is not limited to physical objects. Marketers often use the expressions goods and services to distinguish between physical products and intangible ones. These goods and services can represent cars, groceries, computers, places, persons and even ideas. Customers decide which entertainers to watch on television, which places to visit for a holiday, which ideas to adopt for their problems and so on. Thus the term ‘product’ covers physical goods, services and a variety of other vehicles that can satisfy customers’ needs and wants. If at times the term ‘product’ does not seem to be appropriate, other terms such as market offering, satisfier are used. Value and Satisfaction When the customers have so many choices to choose from to satisfy a particular need, how do they choose from among these many products? They make their buying choices based on their perceptions of a product’s value. The guiding concept is customer value. A customer will estimate the capacity of each product to satisfy his need. He/She might rank the products from the most need-satisfying to the least need-satisfying. Of course, the ideal product is the one which gives all the benefits at zero cost, but no such product exists. Still, the customer will value each existing product according to how close it comes to his/her ideal product and end up choosing the product that gives the most benefit for the rupee – the greatest value. Exchange, Transactions and Relationships Marketing occurs when people decide to satisfy needs and wants through exchange. Exchange is the act of obtaining a desired object from someone by offering something in return. Thought it is only one of the many ways people can obtain a desired object, it allows a society to produce much more than it would with any alternative system. For an exchange to take place, several conditions must be satisfied. Of course, at least two parties must participate, and each must have something of value to the other. Each party also must want to deal with the other party and each must be free to accept or reject the other’s offer. Finally, each party must be able to communicate and deliver. These conditions simply make exchange possible. Whether the exchange actually takes 19place depends on the parties’ coming to an agreement. If they agree, we must conclude that the act of exchange has left both of them better off or at least not worse off. After all, each was free to reject or accept the offer. In this sense, exchange creates value just as production creates value. It gives customers more consumption possibilities. A transaction is marketing’s unit of measurement. It consists of a trade of values between two parties. A monetary transaction involves trading goods and services in return for money whereas a barter transaction involves trading goods and services for other goods and services. Transaction marketing is part of the larger idea of relationship marketing. Marketing is shifting from trying to maximize the profit on each individual transaction to maximizing mutually beneficial relationships with consumers and other parties. This is based on the assumption that if good relationships are built, profitable transactions will simply follow. Markets The concept of transactions leads to the concept of a market. A market is the set of actual and potential buyers of a product. It may exist in a physical environment as a marketplace or in a virtual environment (on the internet platform) as a marketspace. To understand the nature of a market, imagine a primitive economy consisting of only four people – a farmer, a fisherman, a potter and a hunter. Figure 1.2.2 shows the different ways in which these traders could meet their needs. In the first case, self-sufficiency, they gather the needed goods for themselves. In the second case, decentralized exchange, each person sees the other three as potential buyers who make up a market. In the third case, centralized exchange, a new person called a merchant appears and locates in a central area called a marketplace. Each trader brings goods to the merchant and trades for other needed goods. Merchants and central marketplaces greatly reduce the total number of transactions needs to accomplish a given volume of exchange. As economies grow, exchange becomes even more centralized, as seen in the growth of huge companies. Large supermarkets now serve millions of people who formerly shopped in smaller outlets. 20

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