A raw materials market is just like any other market where the exchange of goods occurs frequently and at a reasonable price. Market economies are simply a large venue for transactions between willing buyers and sellers. Within the aggregate market, many little markets exist, such as the raw materials market. In this latter market, individuals and businesses have the ability to purchase the resources needed to produce goods and services. Among the most common materials on the market are natural resources, intermediate goods, and physical goods for business use.
Free market economies experience the phenomenon called the invisible hand. Economists marvel at the fact that goods can move through a market when no central authority exists. For example, a business looks to build houses. The company works with others to obtain lumber, fasteners, and other items from the raw materials market. Vendors in the market will provide these to the builder by gathering them from the region’s natural resources; the result is an invisible hand that moves goods as necessary.
The raw materials market is most often one of the earliest markets an economy will experience. Someone has to start the process of the invisible hand by collecting materials from the natural resources and turning them into intermediate goods. These individuals often start businesses in order to become more efficient at this stage of the market. As the companies collect more and more goods, they list them for sale in the market. These companies are the start of the raw materials market for other companies and individuals.
Sellers are just one part of the equation in any market. They list goods for sale at a price slightly above the cost to gather and produce the goods, intermediate and otherwise. Buyers then come to this market looking for goods they need for personal use; other businesses come to the market as well. The open market dictates prices as efficiently as possible in the raw materials market, just as capitalist principles dictate. Higher levels of competition can force prices down for these items, creating a market where businesses must operate efficiently to succeed.
All markets in a free market economy are subject to expansion, peak, and contraction. Companies must recognize the stage at which the market currently exists. Failure to understand the business cycle will result in a company potentially making poor decisions. For example, expanding when a market is starting to contract is a poor decision. No market is immune to the effects of the business cycle.