MARKET ECONOMY

What is a Market Economy?

A market economy is an economic system in which economic decisions and the pricing
of goods and services are guided by the interactions of a country's individual citizens
and businesses. There may be some government intervention or central planning, but
usually this term refers to an economy that is more market oriented in general .

 In a market economy most economic decision making is done through voluntary

transactions according to the laws of supply and demand.
 A market economy is fundamentally one where entrepreneurs are free to control
and co-ordinate productive resources in order to pursue profit by creating outputs
that are more valuable than the inputs they use up, and free to fail and go out of
business if they do not.
 Economists broadly agree that more market-oriented economies produce better
economic outcomes, but differ on the precise balance between markets and
central planning that is best to provide stability, equity, and long term benefits.

Understanding Market Economies

The theoretical basis for market economies was developed by classical
economists, such as Adam Smith, David Ricardo, and Jean-Baptiste Say. These
classically liberal free market advocates believed that the “invisible hand” of the
profit motive and market incentives generally guided economic decisions down
more productive and efficient paths than government planning of the economy
and that government intervention often tended to lead to economic inefficiencies
that actually made people worse off.

Market Theory
Market economies work using the forces of supply and demand to determine the
appropriate prices and quantities for most goods and services in the economy.
Entrepreneurs marshal factors of production (land, labor, and capital) and
combine them in co-operation with workers and financial backers, to produce
goods and services for consumers or other businesses to buy. Buyers and
sellers agree on the terms of these transactions voluntarily based on consumers
preferences for various goods and the revenues that businesses want earn on
their investments.

Modern Market Economies

Every economy in the modern world falls somewhere along a continuum running
from pure market to fully planned. Most developed nations are technically mixed
economies because they blend free markets with some government interference.
However, they are often said to have market economies because they allow
market forces to drive the vast majority of activities, typically engaging in
government intervention only to the extent it is needed to provide stability.
 Market economies may still engage in some government interventions,
such as price fixing, licensing, quotas, and industrial subsidies. Most
commonly, market economies feature government production of public
goods, often as a government monopoly. But overall, market economies
are characterized by decentralized economic decision making by buyers
and sellers transacting everyday business.

CHARACTERISTICS
1. One of the most important characteristics of a market economy, also called a free
enterprise economy, is the role of a limited government. Most economic decisions
are made by buyers and sellers, not the government. A competitive market economy
promotes the efficient use of its resources. It is a self-regulating and self-adjusting
economy. No significant economic role for government is necessary. However, a
number of limitations and undesirable outcomes associated with the market system
result in an active, but limited economic role for government.
2. In a market economy, almost everything is owned by individuals and private
businesses- not by the government. Natural and capital resources like equipment
and buildings are not government-owned. The goods and services produced in the
economy are privately owned. This private ownership, combined with the freedom
to negotiate legally binding contracts, permits people to obtain and use resources as
they choose
3. A market economy has freedom of choice and free enterprise. Private
entrepreneurs are free to get and use resources and use them to produce goods and
services. They are free to sell these goods and services in markets of their choice.
Consumers are free to buy the goods and services that best fill their wants and
needs. Workers are free to seek any jobs for which they are qualified.
4. A market economy is driven by the motive of self-interest. Consumers have the
motive of trying to get the greatest benefits from their budgets. Entrepreneurs try to
get the highest profits for their businesses. Workers try to get the highest possible
wages and salaries. Owners of capital resources try to get the highest possible
prices from the rent or sale of their resources. This "invisible hand" of self-interest is
the driving force of a market economy.
5. Competition is another important characteristic of a market economy. Instead of
government regulation, competition limits abuse of economic power by one business
or individual against another. Each competitor tries to further his own self-interest.
This economic rivalry means that buyers and sellers are free to enter or leave any
market. It also means that buyers and sellers are acting independently in the
marketplace. When businesses compete for customers, they want to sell their goods
or services at the lowest possible price while still earning a profit for themselves.
Consumers compete for goods and services. If the supply of a needed good or
service is low, the consumer must pay a higher price. Consumers must compete to
get goods or services by paying more or going out of their way to buy the products
they need or want.
 6. A system of markets and prices working together are the structure of a market
economy, not the central planning by government. A market brings buyers and
sellers together. The wants of buyers and sellers are registered on the supply and
demand sides of various markets. The outcome of these choices is a system of
product and resource prices. Prices are the guideposts on which buyers and sellers
make and revise their free choices in furthering their self-interests.

The advantages of a market economy are many. Competition insures greater quality
and lower prices for consumers. Individuals are encouraged to take business risks to further
their own economic interests, which benefit the economy as a whole. Economists Friedrich von
Hayek and Milton Friedman believe that the more economic freedom that is available, the more
civil and political freedoms a society will enjoy.

Some disadvantages are that only those people with resources may take part in a
market economy. There is often an income gap. People with the most resources (money) keep
getting richer, while people with few resources get poorer. Some services, like railroads and
airlines, have problems offering their services while maintaining low prices. In these cases,
government may step in to keep the services available at a reasonable cost to consumers
because the service benefits the society as a whole. Some critics of market economies say that
greed is the driving principle. They think that markets should not be allowed to profit while
causing potential harm to the environment by using up all available resources and polluting the
planet.