Definition of a Market Economy
The 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. This allows the market to operate in accordance with the law of supply and demand. This law dictates that producers and sellers of goods and services will offer the highest possible price that consumers are willing and able to pay for. When price of supply meets price of demand, quantity of supply meets quantity of demand. This is also known as economic equilibrium.
There are several characteristics that identify a market economy:
- Individuals have the right to profit from private ownership of business and property. That is, right to own is not only for the government, as is 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 have equal access to the same information on which to base their decisions.
- Government plays a limited role in this economic system, but has a regulatory function to ensure fair play and less monopoly.
Some countries that adapt this kind of economic system are the USA, Canada, the UK and Denmark. This system is much preferred among more liberal societies.
Advantages of market economy
- Increased efficiency in 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
- Decrease state bureaucracy as some public sector activities can be taken over by private entities
Disadvantages of market economy
- Inevitable periods of economic crisis due to the usual business cycle ebb and flow
- Possible unemployment increase as compared to command economies
- Wider economic and social gap
- 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