How They Work
Market economies refer to systems where economic decisions about pricing of services and goods are solely dependent on the interactions of people and business. They are the reverse of centrally planned economies where government decisions drive the activities of the market. They work primarily on the assumption that the forces of supply and demand are the best determinants of aggregate activities and wellbeing of a market. Ideally, in regions where the system is operational, government interaction in activities such as quotas, subsidies, and price fixing are absent.
According to theoretical proponents for the system, demand and supply forces are the best pointers of the health of a market because the government and other agencies do not have enough information to make the decisions. They argue that interaction from external forces limit the wellbeing of the market. Instead, they believe that rational people with free will and perfect information interact freely to make the best choice in the market. However, in the real world, the conditions that are necessary for the existence of market economies are inapplicable. For example, people rarely have perfect information in making purchase decisions (Ahmed and Zlate 225–226). Moreover, in many countries, the government monitors and regulates the market through taxation to prevent few actors from controlling the market through uninhabited power and corruption.
Features
Some of the key features of market economies include:
Free Market
In market economies, the control of prices is dependent on the interaction between individual and private businesses. The government does not enforce regulations that determine prices. Rather, its role is limited to monitoring the market to prevent exploitation of the consumers.
Free Price System
Moreover, in a market economy, the forces of demand and supply interact to determine the prices of service and goods. The resulting prices, then, guide the distribution and production of goods. In the system, for instance, when the supply is high, the demand and the prices react in an opposite manner.
Unrestricted Competition
Furthermore, business and private enterprises in a market economy are free to compete for all the possible customers. They can implement measures such as advertisement and improvement of product quality to increase their brand awareness for a competitive advantage. However, unrestricted competition is only permissible in ethical considerations.
Minimal Government Interference
Additionally, in an ideal market economy, the government does not interfere with its operation. However, in practice, the government enforces laws that prevent exploitation of customers and unethical competition.
Profit Motive
Equally, the primary motivator of business operation is profits making in market economies. Companies and firms create strategies to allow them to attract the highest possible number of clients and generate maximum returns on investment. In other words, success is a measure of the profits that business makes in the market economy.
Importance
Market economies are primarily important because they drive the growth of the economy. In market economies, businesses freely strategies and compete for the available clients. Consequently, competition leads to the generation of more money through profits, which companies inject into the economy. Moreover, competition necessitates the continuous improvement the quality of services and products, which increase the overall performance of an economy on an international scale (Mihalyi, Szelenyi, and others 3–4).
Finally, market economies promote the growth of private sector in a nation. Because of minimum government interaction in market economies, private investors freely determine their interest areas for investment. In private run business, the primary motivation for operation is a success, which means that to increase returns investors have to work harder. Moreover, the growth of the private sector leads to the creation of jobs and an improvement of the lignin standards, which benefits the economy in general.
- Ahmed, Shaghil, and Andrei Zlate. “Capital Flows to Emerging Market Economies: A Brave New World?” Journal of International Money and Finance 48 (2014): 221–248. Print.
- Mihalyi, Peter, Iván Szelenyi, and others. Two Different Sources of Inequalities: Profits and Rents in Advanced Market Economies. Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences, 2016. Google Scholar. Web. 4 Apr. 2017.
