A market economy is one in which the basic economic choices are made by individual buyers and sellers interacting in markets. A market system is also termed a price system because price is the language through which buyers and sellers communicate their intentions. For example, McDonald’s expresses its intention to sell Big Macs by making them available at a particular price, and a student tells McDonald’s that he or she wants a Big Mac by particular price.
The status of “market economy” lies in a country where decisions on investments, production and prices are based on the interaction between supply and demand. This is a system opposed to the planned economy, in which the government’s decisions determine the economic activity.
Main features of the market economy:
- Freedom to define prices for services and goods. Free competition is what regulates the market in relation to prices;
- Production and consumption of goods and services established by the interaction between supply and demand;
- Almost all products and services of a market economy are produced by private enterprise (industries, trades, banks and service providers). In a country that follows this economic system, there are few state-owned enterprises, usually in strategic sectors (eg power generation);
- Freedom to open and run businesses, with little or no government interference;
- Foreign trade with few obstacles and obstacles (bureaucracy, taxes, customs fees);
- Insertion of companies in the globalized world;
- Little or no action by the Central Bank to control exchange rates. In much of the countries that follow the market economy the exchange rate is fluctuating;
- Market mediated by the interaction between producers and consumers;
- Protection, through laws, of private property;
- The State control and regulation of the economy, aiming to curb irregular practices or actions that may cause problems to the market operation. The State also acts in essential areas (public services) such as education, health and public safety
The basic structure of a market economy can be fully explained by focusing on the two buyer-seller relationships of businesses and households at the same time, or on. Businesses and households relate to one another through input markets and output markets. Households sell labor, capital, land, and entrepreneurship to businesses in return for income in input markets. That income is then used to buy goods and services from businesses in output markets.
How Economic Decisions Is Made In Market Economy
The first question, what and how much to produce, is the result of millions of independent decisions by individual households and businesses in the marketplace. An item will be produced if a business perceives that enough households will purchase the item at a price that will make its production profitable. If a business determines that individuals do not want a good or service, or will not pay a profitable price, the business will eventually stop producing that item. This type of decision making accounts for the continued appearance of pocket calculators and the Ford Mustang, and the disappearance of particular doting styles and the slide rule from the market Also, the emergence of such items as camcorders and CD players resulted from household demand for these products and the ability of businesses to produce and sell them at a profit.
Is it believable that individual buyers can force large sellers like auto manufacturers or soft drink producers to change their products? The balance of power between a single person and a single business is obviously weighted in favor of the business Yet individuals do influence businesses. While one buyer acting alone may be virtually powerless against a business, the situation changes when many buyers share the same opinion. Without talking to one another, individual buyers decide for or against a product by the way they spend their money. The dollars consumers spend for businesses’ products are tallied in the same way that electoral votes are tallied for a political candidate. Those businesses that do not get enough dollar votes may be forced to change their products or leave the market completely.
The second critical question, how goods and services will be produced, is answered by businesses in a market economy through their choices of particular methods of production. Any good or service can be produced in more than one way, and a business must decide which of the available techniques it will use for production. For example, suppose that the engineers at a company manufacturing stereo receivers identify three different production methods for assembling the identical product: by machine, by hand, or by a combination of labor and machinery.
The modern market economy, is established with Industrialization. It has increasingly spread its influence on human life, , mental and behavioral schemes, commercializing leisure activities, transforming cultural heritage in objects of speculation and widely supporting scientific research to their needs.
Evaluating Market Economies.
A market economy has both strengths and weaknesses. On the plus side, market economies are efficient because of the operation of incentives. The profit incentive causes businesses to produce in an efficient manner, and income rewards provide an incentive for households to use their resources effectively or to improve them. Many students, for example, invest in an education to become more productive in input markets and obtain a higher salary. Market systems are also efficient in that the information required for decisions on production and distribution passes directly between buyers and sellers rather than through a central clearing house or authority as in a planned economy. The market, rather than a planner, coordinates business and household actions An additional strength of a market economy is that production and distribution decisions reflect the value judgments of buyers and sellers in the market rather than the value judgments of planners.
One of the weaknesses of a market system is that it offers no protection for people lacking adequate knowledge to make informed market decisions. For example, the effects of chemicals used in certain foods and medications or the inner workings of an automobile or appliance may not be fully understood by the average consumer. In a market system, there is no organized effort to ensure that products will be safe for use by the uninformed consumer. There is also nothing in the market mechanism to ensure that households lacking adequate resources will be able to acquire enough goods and services to maintain themselves. Put another way, a market does not have a morality of its own. Also, the ability of consumers to influence the quantities, quality, and prices of products in a market system may be weakened if individual markets become dominated by small groups of firms: it is easier for consumers to influence the quality of a product when there are one hundred competing producers than when there are two. Finally, the incentive to produce at the least cost could cause businesses to make production decisions that have a detrimental effect on the environment
Conclusion About Market Economy
In summary, in a market economy the basic economic choices are made by individual buyers and sellers. Businesses produce the goods and services that buyers indicate they want by their spending patterns in the markets. These goods and services are produced using the least-cost method of production, since this method allows the owners of businesses to maximize their profits. Finally, it is the individual household’s ability to sell its own resources in input markets that determines its ability to acquire the goods and services of its choice in output markets.