Understanding Market Dimensions and Economic Demand

Market Size: Understanding Economic Dimensions and Demand

Market Definition: The set of companies competing to provide the same or equivalent goods or services.

The economic size of a market is a key concept for understanding the situation and dynamics of an economic space. It refers to the volume of buying power within that economy. Thus, it is closely related to the application and its components. The magnitude of demand is a basic signal that firms face regarding their production opportunities and future plans, aimed at profitable buyer profiles and movements. Any process of economic growth in a territory is driven from two sources: production and demand.

Variations in the components or variables that make up the economic size of demand drive producers to adaptation processes, reflecting important changes and phenomena that could influence the structure of that economy.

Key Components of Economic Market Size

The components that make up the economic size are:

• Resident Population: Indicative of the potential consumer base, including families and households.
• Income Levels: Reflects the movement of income groups and the overall income an economy possesses.
• Intermediate Demand: Represents purchases by firms to meet production targets and maintain their presence in the economic fabric.
• Public Spending: Encompasses both its current size (public consumption) and items of public investment (capital expenditures). The size and strategic role of the public sector, with its various administrations, are specified in data such as employment, economic activities in the territory, creation of external economies and infrastructure, and many other tasks.
• Consumption of Non-Residents: Purchases made within the territory by external operators who temporarily take advantage of their stay to conduct business. For example, in the Canary Islands, the demand from tourists, the provisioning of ports and airports, or the so-called 'luggage trade' by Africans traveling to the islands to purchase goods in the commercial sector, represents a significant proportion of the market size in the Canary Islands.

Market Composition and Business Viability

The economic size of the market shows the composition of goods and services within that economy for the financial year concerned. In that composition, it is important to distinguish the diversity of products based on the volume of demand. This last point, regarding critical mass, is crucial for understanding the conditions under which products are offered, their business viability, and the degree of competition in the market. If the demand threshold falls below the point where average costs cannot guarantee sales and profits, the market will favor imports over local production. Otherwise, local buyers might pay a premium (representing income transfers from consumers to producers) for products that also carry the risk of inferior quality and service.