Learn 100% online from anywhere in the world. Enroll today!

Market Economy

Overview and definition of a market economy

What is a Market Economy?

A market economy is defined as a system where the production of goods and services are set according to the changing desires and abilities of the market players. It allows the market to operate freely in accordance with the law of supply and demand, set by individuals and corporations, as opposed to governments.

 

Market Economy Busy People

 

The principle of market economy dictates that producers and sellers of goods and services will offer the highest possible price that consumers are willing to pay for goods or services. When the level of supply meets the level of demand, a natural economic equilibrium is achieved.

The opposite of a market economy is a command economy, which is centrally controlled by the government.

 

Characteristics of a Market Economy

  • Individuals are allowed to profit from private ownership of business and property. Ownership rights are not only for the government, as in a command economy.
  • Market players are free to produce, sell, and purchase as they please, subject to government regulations on illegal products.
  • The market is motivated by individuals trying to sell their offerings to the highest offeror, while simultaneously attempting to pay the least for goods and services that they need.
  • Competition is present among producers, which keeps prices fair and ensures efficient production and supply.
  • Players enjoy equal access to relevant information on which to base their decisions.
  • The government plays a limited role in a market economy but performs a regulatory function to ensure fair play and less monopoly.

Some countries that adopt a market economy include the USA, Canada, the UK, and Denmark.

 

Advantages of a Market Economy

  • Increased efficiency in the production of goods and services due to business competition
  • Encourages innovation, which keeps the market evolving
  • People work harder to maintain their livelihood and prevent losing their jobs
  • Growing markets attract foreign investors
  • Wider variety of consumer goods available
  • Encourages entrepreneurship and new ventures
  • Decreased state bureaucracy, as some public sector activities can be taken over by private entities

 

Disadvantages a Market Economy

  • Inevitable periods of economic crisis due to the usual business cycle ebb and flow
  • Possibly higher unemployment levels as compared to command economies
  • Wider economic and social gaps
  • Possible exploitation of labor
  • Basic necessities may be harder to provide, as they are affected by demand and supply
  • Profiteering is favored over social welfare

 

Related Articles

CFI is the official provider of the global Financial Modeling & Valuation Analyst (FMVA)™ certification program, designed to help anyone become a world-class financial analyst. To continue learning and advance your career, see the following free CFI resources:

  • Command Economy
  • Investment Banking
  • Corporate Finance Career Resources
  • Financial Modeling Guide

Financial Analyst Certification

Become a certified Financial Modeling and Valuation Analyst (FMVA)® by completing CFI’s online financial modeling classes!