We explain what the market economy is and how it works, as well as its characteristics, advantages and disadvantages.
The market economy is a system that promotes free participation.
What is market economy?
The market economy is a model of exchange of goods and services that is regulated by economic forcesthat is, by buyers and sellers who are able to set market prices. It requires free competition and the least possible intervention by the State.
It is also called free market economybecause it can self-regulate, which means that For every product that is demanded or required there is a product that is offered in the marketThese two basic laws of economics establish the “law of supply and demand” which also contributes to the diversity of competitors, something that does not happen in economies strictly regulated by the State.
On the other hand the statist market It’s that one regulated by decisions imposed by the State, beyond what sellers can offer to achieve a profitable business and what buyers can acquire.
In most markets in the world a type of social market economy, in which both economic systems coexist: the free market, which is regulated, in part, by the State of each nation. It is the basis of the capitalist system that encourages the accumulation of capital and defends the private ownership of the means of production.
How does the market economy work?
The market economy is self-regulated by the law of supply and demand.
The market economy or the free market is a physical and virtual space in which buyers and sellers interact. The rules of this exchange are established by the law of supply and demand, in addition to various measures implemented by the State.
The supply is the availability of goods that are exchanged at a freely assigned pricebased on demand, which is the quantity of goods and services available in the market according to what consumers are willing or able to pay.
- Example of the law of supplyThe relationship between price and quantity produced is directly proportional. That is, the more expensive a good is, the more the seller can produce.
- Example of the law of demandThe relationship between price and the quantity of products sold is inversely proportional. That is, the lower the price of a product, the more units will be sold, and the higher the price of a product, the fewer units will be sold.
- Market equilibrium. The law of supply and demand allows us to achieve a price balance in which the quantities of goods demanded and offered are equal. That is, it allows the market to self-regulate and establish a price that buyers are willing to pay and that results in a favorable deal for the seller.
Characteristics of the market economy
The main characteristics of the market economy are:
- It allows freedom of choice between various goods and services.
- It allows free market participation to sell.
- It encourages the development of competitors who must offer more advantages to buyers to remain in the market.
- It achieves a balance of prices that are subject to the purchasing power of the market and not to the centralized decisions of a monopoly.
- Reduces State intervention in decisions related to prices, production and marketing.
- It contributes to the accumulation of capital and investments as sources to generate wealth.
Advantages of the market economy
The main advantages of the market economy are:
- There are no or minimal taxes and controls by the State.
- It enables the variety and diversity of products (suppliers) in the market that represent greater price competitiveness.
- Promotes quality consumer service, products and innovation so that buyers choose one product among many others.
- It promotes the ability to accumulate capital, freedom of manufacturing and free association between companies.
Disadvantages of the market economy
The main disadvantages of the market economy are:
- It does not take into account the most vulnerable sectors, since people who lack sufficient capital, resources or knowledge usually do not have access to the market.
- There may be situations of monopoly and unfair competition.
- It promotes increased consumption with the aim of generating greater economic profits, at the cost of irreversible damage to the environment, a variable that is not usually considered in liberal economic theories.
- It presents difficulties in achieving effectiveness between the free action of the market and an optimal level of State regulation.
Marxism vs. liberalism
Marxism and liberalism are opposing political and economic theories, which propose two types of development for a nation.
- Marxism holds that the means of production should be owned by the state, so that different social classes do not exist.
- Liberalism maintains that the means of production must be owned by private capital and that everyone has the possibility of intervening in market decisions.
In the reality of modern societies, both theories have shown that they cannot be applied in a comprehensive manner, but rather present market failures. or situations in which the market balance is not achieved and negative consequences are generated in its operation.
- For example: imperfect competition, unequal distribution of wealth, the existence of public goods and the instability of economic cycles.
Examples of market economy
A new cell phone will be more expensive than the previous model, which is still on the market.
Some examples of different situations in the market economy are:
- Strawberry production has been affected by extensive droughts. Given the shortage of supply, the few producers who managed to harvest strawberries are selling them at a high price on the market to offset losses during the planting process, but they will not be able to meet the entire demand.
- The launch of a new cell phone model generates a high level of demand, so the previous model, still in force, is cheaper to compete with the new product.
- The clothes of the fast fashionwhich means “fast fashion” in English, promotes the consumption of new clothes every year and requires selling everything produced. Therefore, at the end of the season, it reduces prices so that consumers are tempted to buy them anyway.
Follow with:
References
- Orlitzky, M. (2022). Free marketfrom Britannica
- Khan Academy (2022). Changes in trade balancesfrom KhanAcademy
- Rodriguez, CE, (2013). Market failuresfrom UCA