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What is a Market Economy? – Characteristics, Advantages, and More

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:

Private Property

Various types of forms of private property make it possible to guarantee the economic independence and sovereignty of financial entities.

Free Enterprise

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

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:

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:

Gradualism

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.

Shock Therapy

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

Advantages of the Market Economy

Disadvantages of the Market Economy

Conclusion

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.

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