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Economists are always interested to know the characteristics of markets in terms of supply and demand. As the markets are governed mostly by supply and demand they have unique natures and attributes. These attributes are applicable to market economies or free-market economies.
What is a Market Economy?
A market economy, in economics, refers to a market system that is governed by forces of demand and supply instead of government control. In such economies, the production of goods and services depends on demand and supply. The market in the case of a free-market economy acts depending on voluntary exchange.
The interplay between supply and demand is a driver of a market economy. When the demand exceeds the supply, the price of goods goes up as sellers get an opportunity to charge high for goods that are needed or wanted by consumers. On the other hand, when supply is more than the demand, the prices of goods and services go down. In the case of supply exceeding demand, the shoppers get options to consume goods from various sellers. So, to sell the goods and services, the sellers charge lower prices.
The demand and supply tend to have a balance over time because the consumption patterns seem to stay intact for a certain period of time. This balanced situation however does not last long. So, the market economies remain fluctuating from one stage to another most of the time.
Characteristics of Market Economies
As market economies are run by the invisible hand of demand and supply, they develop some unique characteristics.
These include the following:
The benefit of taking advantage of demand and supply is available to both government and individuals in a market economy. This means that both governments and private players are permitted to engage in the market economy. This private property benefit is a unique characteristic of the free-market economy.
The participants of a market economy can buy, sell or exchange anything they choose. Moreover, they can provide goods and services that they manufacture for a profit. This is however limited to government rules. However, most governments allow participants to produce, buy and sell most of the goods in a free-market economy.
Individuals participating in a market economy have self-interest as a priority. They want to sell the product to the highest bidders (at maximum price) while they want to buy the products at the lowest price (or the lowest bidder). This characteristic determines the market price of products to some extent.
In a market economy, there should always be fair competition. There should be more than one supplier of a product which will keep prices fair and assure effective manufacturing. The competition in a free market also promises effective supply. As the competition increases over time, manufacturers are forced to resort to fair pricing which helps the end consumers have an advantage over the pricing of goods they consume.
Low intervention of Government
In a free-market economy, there is minimum government intervention. The government does not direct the market by making policies. Instead, it acts as a referee for a fair market and removes monopoly.
Pros and Cons of Market Economy
A free market economy has some distinct advantages and disadvantages.
Consumers decide the supply and demands
As the free markets are governed by supply and demand, the manufacturers produce goods that have demand in the markets. This leads to the production of high-quality goods. In a free-market economy, consumers have the most advantage because they can decide to buy the best products and manufacturers can be forced to produce only the best goods.
Competition leads to efficiency
In a free market, there is always a high level of competition which keeps the manufacturers on their toes. This leads to manufacturing efficiency. Firms without manufacturing efficiency cannot sustain themselves in a free market.
Innovation to earn more profit
In a free-market economy, manufacturers tend to innovate their products so that these products suit the consumers more. This helps them earn more profits. Innovation also spreads to other competitors which let them produce innovative items alike which make these competitors more profitable too.
Investment opportunities in one another
In a free-market economy, enterprises can invest in one another when they see a profitable opportunity. This helps in the production of goods of the best quality.
Generation of employment opportunities
As the free market runs on competitive terms, manufacturers need to employ many individuals to keep their firms up and running. Therefore, the free market not only provides the best products but also helps in employing a number of individuals.
Leaving the weaker sections out
The free market does not offer an opportunity to the weaker sections of businesses and individuals as it runs on the competition. So, there is an effective bias against the weaker players in a free market. Older people, kids, and mentally and physically handicapped people usually do not get any advantage in a free market.
Emergence of poor-quality products
As the producers in a free market tend to produce mass-products to suit the growing needs of consumers, the quality of products may suffer a drawback. This is applicable more to capitalist economies where producers want to gain maximum profits by selling the maximum number of goods.
In a free market, businessmen have the authority to control prices. They may increase the prices when they want by manipulating the market economics from time to time.
Everyone cannot achieve the maximum
In a free market, everyone cannot reach the maximum levels of efficiency. For example, low-wage workers work in unhealthy and dangerous situations to survive which could be avoided if markets were poor-friendly.
Determinants of demand and supply in a free market economy
There are various factors that affect the demand and supply in a free market economy. These factors are listed below.
Determinants of Demand
Changes in any one or more can affect the demand for a good in a free market:
Tastes, popularity, and preference of a product
The population of buyers of a product
Income of the purchasers who are in need of a product
The price of the complementary goods
The price of substitutes
The expectations of prices of goods in the future
Determinants of Supply
Changes in any one or more of the following factors may affect the supply:
The prices of resources or raw materials
The technology associated with the production of a good
Subsidies and taxes on the produced items
The expected price of goods
The population of the sellers in the market
A market economy is the best since it provides the consumers an upper hand. As the prices of products and services are determined by demand and supply, consumers can dictate the prices of products.
Moreover, it is generally known that products of the best quality are obtained in a free economy. Therefore, the idea of a free economy is the best approach for the general population.
1. Why is the balance between supply and demand hard to achieve for a long time?
Ans. For a balance, the demand and supply must remain constant. However, in real markets prices keep changing due to determinants of changes in demand and supply. That is why the markets keep fluctuating over demands and supply.
2. What are some other forms of economies?
Ans. Capitalists economy, socialist economies, command economies, and mixed economies are the other forms of economies.
3. What are the forms of most of the modern developed economies?
Ans. Most of the developed modern economies are mixed economies that are a mix of free-market and some government control over the economy.
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