Types of Market Economies

Introduction: What is a Market Economy?

A market economy is a type of economy where demand and supply control the marketplace. In a market economy, there is minimal government intervention whereas the price and quantity of goods are determined by the demand and supply of products in the market. A market economy encourages entrepreneurship and drives competition and innovation in the economic system which leads to consumer satisfaction and production efficiency.

Market economies are also known as free markets where government intervention is minimal to moderate. Businesses in a free market are free to take decisions regarding the price of the products it sells in the market. Capitalist economies, such as those in the US closely resemble market economies.

• In market economies, businesses independently produce goods and services depending on the demand for products in the market. Moreover, the resources of the market system, such as land, labor, capital, etc. are under the control of private ownership.

• Businesses in a market economy are free to invest, trade, and produce as they deem suitable. The government usually does not bar private owners from participating in an investment, trade, and production of goods until it harms citizens or may be detrimental to a section of society.

• In a market economy, the producers understand the consumer demand in the market and follow it to produce the goods and services. The markets usually have an equilibrium of demand and supply which decides the price of goods and services. Hence, market economies are purely run depending on market forces that determine the prices and quantities of products required in a market system.

• Although the government’s role in a market economy is limited, it is important. The government makes sure that everyone gets an equal chance for market trading. It also makes sure that the market rules are applied to all equally. The government also charges taxes, fees, etc. for the welfare of the people and regulates the market according to government policies.

Types of Market Economies

There are six major types of market economies which are the following −

Perfect Competition

In a market of perfect competition, all of the businesses sell the same products. The prices of the products available in the market are not influenced by market share. Moreover, there should be enough transparency while sharing product information with the customers. There should be no barrier to entry for new pliers to enter the market. Finally, the companies do not have any role in determining the prices of products.

Monopoly

In a monopoly, there is only one seller of a product in the market. There is no competition, therefore, in the market. The monopoly firm is able to determine the price of products it sells in the market. That is, a monopolistic firm is a price maker.

Monopolistic Competition

In monopolistic competition, there are numerous companies selling non-identical products that are similar and fall within the same category. So, the firms cannot determine the prices of the products. Therefore, the firms in monopolistic competition are not price makers.

Oligopoly

In an oligopoly, there are a few players with some unique products where the firms act in unison to decide the prices of the products. As a result, the oligopolistic firms can raise the price to profit by cooperating with one another.

Oligopsony

In an oligopsony market, there are few powerful buyers and numerous sellers where the markets are for inputs. The price of the product in oligopsony is decided by the buyers.

Monopsony

In a monopsony, there is only one buyer but numerous sellers. The buyer is thus able to dictate the prices and the first are price takers in the market.

Characteristics of Market Economy

There are some noticeable characteristics of market economies which are listed below −

• Freedom of choice − Owners in a free market are free to produce, buy, and sell anything they wish. However, two factors are out of the control of the owners. The first is the buyer should be able or willing to pay the price they have set for the product. The second is the capital the owners have is determined by the price of the product at which they can sell them and the costs to produce and sell the goods they have produced.

• Self-interest motive − Free market economies run with the motive of self- interest. The producers and buyers can create or buy products that suit their interests. Businesses can act in an order that best suits them while there is no bar in choosing, applying, and following one’s own policies. There are enough opportunities in a market economy that can be explored by individuals and by earning the way they want; individuals can live the way they want.

  In a market economy, the producers buy resources at the lowest price while selling products at the highest price. This may seem to be a selfish policy but this helps the economy in the long run. Looking for the best opportunities creates competition and drives innovation that helps the economy grow over a longer period of time.

• Competition − Competition in a market economy keeps the prices low in the market. It also ensures that society provides resources more efficiently. As soon as demand increases, the prices rise due to the law of demand. The producers see that they can enhance their profit by increasing supply. This helps in keeping costs and therefore prices low. The profit level goes to a certain level where only the best performers can sustain themselves in the market.

  Competitive forces are applicable to workers and consumers too. Employees fight for the best job and the sellers sell products at the lowest price possible to remain competitive in the market.

• The system of markets and prices − Market economies depend on efficient markets for selling goods and services. An efficient market is one where information about prices, demand, and supply is accessible to both consumers and producers. Therefore, price changes occur due to supply and demand only which is known to all players in the market.

• Limited Government intervention − As mentioned above, market economies have limited government intervention. Governments may intervene to maintain safety, security, and fairness while also making sure that businesses do not exploit consumers.

Conclusion

A market economy is considered the best form of the economy because everyone is free to exercise their will in a deal. An understanding of the market economy is therefore important for everyone.

FAQs

Qns 1. How many types of market economies are there?

Ans. There are six major types of market economies.

Qns 2. What is a monopsony?

Ans. In a monopsony, there is only one buyer but numerous sellers. The buyer is thus able to dictate the prices and the first are price takers in the market.

Qns 3. Is there any competition in monopoly?

Ans. In a monopoly, there is only one seller of a product in the market. There is no competition, therefore, in the market