Market economy

A market economy is an economic system in which economic decisions and goods and services prices are governed solely by the global interactions of a country's individual citizens and businesses. It shows very little government or central planning intervention. Within this type of market, people are able to exchange resources for other different resources, whether goods or services, on a voluntary basis within the market. The value of the resources that are exchanged will depend on the degree of scarcity of each of them and on the number of people in need of such a product. When the supply of the product is low, but there is a lot of demand, the price can be set high. Otherwise, if demand is low and supply is high, the price will have a downward trend.

Related topics

Imperfect competition, perfect competition, comparative advantage

What is the market economy?

A market economy is an economy in which most of the resources you have are controlled by individuals and are assigned through voluntary market transactions governed by the interaction of supply and demand.

About market economy

In the market economy, the State will have a role as a provider of legal frameworks allowing free competition between companies, including protecting property rights, acting as an intermediary of problems through courts and acting subsidiarity in cases where competition is limited. It consists of generating a balance between the bidders and the plaintiffs in order to produce an economic benefit and a certain level of utility. It seeks to meet the needs of both individuals and society through all productive activities. The economy of a place is the one that makes sure that the distribution of all goods and services is carried out in a correct way, always seeking to satisfy as many people as possible, and for this purpose, it creates a series of laws based on the fact that all resources can be exhausted, forcing them to take important decisions in order to find the best way to use them.

Characteristics

Below, we explain some of the main characteristics of the market economy:

• It works through signals: This means that signals function as keys and are in fact are the prices.
• It is decentralized.
• The worker will be remunerated depending on what he or she is able to contribute to the process.
• The aim is to produce in a balanced
• It watches that the production works properly.
• It allows to make decisions about the different commercial relations with other groups.
• It works with the terms of private company and competition.

Origin

The word market economy emerged during the Cold War and was used to designate the different economic systems of countries that had important roles within private property and free market but did not have a democratic political system.

How does the market economy work?

The market is in charge of making decisions about what, how and for whom the economy is directed. It works according to supply and demand, which determines the price of goods and services, and the market distributes income through capital and work. The State is in charge of providing different rules to promote the correct free competition of companies.

Advantages of a market economy

The advantages of this type of market are as follows:

• You are free to choose the products of both the bidders and the plaintiffs.
• The price system is very flexible.
• Thanks to the market economy, supply and demand present very few imbalances.
• It has an initiative market system.
• It is based on Say’s law, which says that all demand creates its own supply.
• It prevents the government from interfering with economic activities.
• It does not require centralized planning.

Disadvantages

• It is a kind of unfair economy because only those with incomes can access it.
• It is inequitable because many times Say’s law is not complied with.
• Prices are very inflexible.
• It does not care about the individual, only about the social aspect and maximizing profits. It can cause harm to people.
• It can lead to market failures, social injustice and exclusion of the public.
• Monopolies and oligopolies can be created.

Importance of the market economy

It is important because most economic decisions are made by buyers and sellers, not by the government. It helps to competitively promote the efficient use of your resources. It is a self-regulating and self-adjusting economy.

Examples

A typical example of a market economy can be seen when the new technology has a fairly high price at the time of going to market, but then, the price goes down as this technology becomes more available.

Another example is the great company known as Coca Cola, this company only works to generate income regardless of the quality of the product and regardless of whether they are harmful to health, despite this, individuals continue to consume and produce large revenues to the company.