What is a Market Economy? – Characteristics, Advantages, and More
The market economy is a system of economic relations based on the linkage of sale and exchange. It is a system in which the State does not play a decisive role and makes decisions independently by each economic entity. A market economy is characterized by private ownership of resources, using a system of markets and prices to coordinate and manage economic activity.
A market economy guarantees the consumer’s freedom, which is expressed in the autonomy to choose in the market for goods and services.
Characteristics of a Market Economy
The following characteristics are inherent in a market economy:
Various types of forms of private property make it possible to guarantee the economic independence and sovereignty of financial entities.
Economic freedom allows the manufacturer to choose the types and forms of activity and the consumer the opportunity to buy any product. The market economy is characterize by consumer sovereignty: the consumer decides what should be produce.
Pricing Built on the Stock and Demand Mechanism
Values in the market system are not set by anybody but are the effect of the interaction of supply and demand. Therefore, the market performs a self-regulatory function. It provides a rationally efficient method of production.
The competition generated by free initiative and freedom of choice forces producers to produce the goods that customers need and have them most efficiently.
Limited Role of the State
The State only supervises the economic responsibility of the subjects of market relations: it requires companies to answer for the obligations with their property.
Economic System of Macroeconomic Indicators
The set of macroeconomic indicators of a market economic system:
- The high GDP (GNP) growth rate is 2-3% per year.
- The low annual inflation rate is not higher than 4-5%.
- The state budget deficit is not more than 9.5% of GDP.
- The unemployment rate is no more than 4-6% of the size of the country’s economically active population.
- Non-negative balance of payments of the country.
Strategies for the Market Economy
The countries that decided to make the variation to the market inevitably tackled the question of choosing the concept of economic development. There are two different concepts to implement this transition:
Involves slow, step-by-step reform. This concept is seen as the source of market transformations by the State, which should gradually replace elements of the administrative command economy with market relations. In the initial stage of change, regulating wages, prices, control of external links, banks, and also, license management is necessary.
Therefore shock therapy implies anti-inflationary policies as the primary tool—the liberalization of prices and a sharp reduction in public spending. However the choice made by most countries with economies in transition in favors of “shock therapy” is determine by objective factors. At the initial stage of the transition period, there are often no conditions for implementing the “gradualism” strategy.
Common Elements of a Change Strategy to a Market Economy
- Liberalization of the economy.
- Macroeconomic, financial stabilization.
- Institutional Transformation.
Advantages of the Market Economy
- When the market is competitive, the efficient use of resources will lead to economic growth and increased competition.
- It promotes innovation and efficiency by forcing companies to compete and also, continually improve.
- The State must have a role of protector of property rights and also, the economic environment. It prevents governments and institutions from distorting economic activities by responding to different individual interests or power groups. Therefore, it does not need centralized development, where the authorities must decide without having complete information on costs, preferences and other factors that affect the market balance.
Disadvantages of the Market Economy
- There may be difficulties in terms of efficiency and, therefore, the presence of externalities or market failures. Situations of social injustice, pollution or exclusion lead the public sector to intervene.
- Creation of monopolies or oligopolies, reducing competition and also, increasing price levels.
- It can lead to a properly unacceptable circulation of resources.
A market economy is a financial system in which the decisions about investment, production and also, distribution to the consumers are guided by the price signals creat by the forces of supply and demand, where all dealers and customers are unimpeded by price controls or restrictions on contract freedom.