Market Economy – A market economy is understood as an economic system marked by the predominance of private initiative in the economy. In this model, the existence of public or state-owned companies in the economy is admitted, but these must be fewer in number and must not dictate the pace of trade.
Also read : Everything You Need To Know About Mixed Economy
Table of Contents
A system of economic interactions based on the linkage of sale and/or exchange is known as the market economy. In this system, each economic body makes decisions on its own and the state does not have a major influence. It is one in which resources are privately owned and in which economic activity is regulated and coordinated via a system of markets and pricing.
A market economy guarantees, above all, the freedom of the consumer , which is expressed in the autonomy to choose in the market for goods and services. The freedom of enterprise is expressed in the fact that each member of society independently distributes its resources in accordance with his interests, if desired, the process of production of goods and services can be independently organized. The individual himself determines what, how and for whom to produce, where, how, to whom, how much and at what price to sell the products, how and on what to spend the income.
What Are The Characteristics Of The Market Economy?
According to the National Geographic Society, market economies have certain characteristics: For example, the concept of private property is fundamental to the market economy, since it gives owners the right to sell their goods.
Let’s look at 4 other key features below:
1. Freedom of Choice
When owners are free to produce, sell and buy goods and services in a competitive market.
When the force of competitive pressure keeps prices low. Competitors see that they can increase their profits by producing the same item, increasing supply. That brings prices down to a level where only the best competitors remain.
3. Market and Price System
A market economy is based on an efficient market, a market is said to be efficient when all buyers and sellers have equal access to the same information about prices, supply and demand. The determinants of supply and demand are what drive the changes that occur in the market system.
4. Limited Government
One of the functions of government is to ensure that markets are open, functioning, stable, fair, and secure. For example, the government creates regulatory bodies to ensure that products are safe for use and consumption and that companies do not take advantage of consumers.
Positive Aspects of the Market Economy
The main advantages of the market economy are the following:
- When the market is competitive, the result will be efficient use of resources, leading to economic growth and increased competition .
- It promotes innovation and efficiency, by forcing companies to compete and continually improve.
- It prevents governments and institutions from distorting economic activities by responding to different individual interests or power groups. Therefore, it does not require centralized planning, where the authorities must decide without having complete information on costs, preferences and other factors that affect the market balance. The State should have a role of protector of property rights and the competitive environment.
Negative Aspects of the Market Economy
The main disadvantages of the market economy are the following:
- There may be problems in terms of efficiency and, therefore, the appearance of externalities or market failures : situations of social injustice, pollution or exclusion that lead the public sector to intervene.
- Creation of situations of monopolies or oligopolies, reducing the level of competition and increasing price levels.
- It can lead to a morally unacceptable distribution of resources.
Features and Operation of Market Economy
The functioning of the market economy has the objective of maximizing profit and not only meeting the social needs of a country.
The market economy obeys the law of supply and demand . This consists of setting prices based on the demand for a particular product or service.
A highly sought after product, which the market does not have in quantity to meet all consumers, tends to rise.
On the other hand, when the market has an excess product that has no commercial outlet, the price tends to fall.
The main features of the market economy are:
- predominance of private companies
- law of supply and demand
- free competition
- encouraging the dynamization and innovation of companies
- opposes the economic model of planned economy
- little state intervention
An economy that operates on the interaction of supply and demand for goods and services is known as a market economy. The market encourages entrepreneurs to compete freely. An economy with a market is one that: First, supply and demand are the foundation of the economy. Second, supply and demand have a role in determining how much of an item or service is produced. Traditional, command, market, and hybrid economies are among the four types of economies. Price-fixing, licensing, quotas, and industrial subsidies are examples of government interference. It has advantages such as improved productivity, creativity, and efficiency. Monopolies, a lack of government interference, subpar working conditions, and unemployment are drawbacks.
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