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Market Economy

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Market Economy

Did you know different economies exist around the world? The main ones we see are market economies, command economies, and mixed economies. They all work differently, with each having its own set of pros and downsides. We will be focusing mainly on market economies, so to learn how they work, their characteristics, and learn about a few examples of market economies, continue reading!

Market economy definition

The economic system used by society, like a command economy, market economy, or mixed economy, has a substantial impact on resource allocation. Each system has its own set of institutional structures as well as a coordinating method for allocating limited resources and allocating output.

In a command economy business is owned by the government, and manufacturing and sales choices are made by a central authority (the government).

A mixed economy allows private property and enables some economic liberty in terms of capital, but it also permits governments to intervene in economic activity to achieve social goals.

The distribution of available resources for diverse purposes is referred to as resource allocation.

Free market economy

The market economy, also known as a free market economy, is a system in which supply and demand dictate how products and services are produced. Natural resources, capital, and labor are all examples of supply. Purchases made by consumers, corporations, and the government all contribute to demand.

Market economy (free market economy) is described as a system in which the production of products and services is determined by the changing demands and capacities of market participants.

A 'free market economy' and 'market economy' terms are used interchangeably.

Market economy is one in which both private and public ownership of firms is common. These businesses employ laborers and workers. Businesses and customers own land, buildings, resources, and currency. These parties can do business with one another as they see appropriate, and consumers can purchase and sell. Businesses offer their goods and services at the greatest price that customers are willing to pay.

An economy is a mechanism for organizing the productive and consumptive functions of a society.

Competition affects prices as well. If one company sells a product for $10, another company offering an identical item may price their item at $9 to attract more customers. This rivalry allows customers and other companies to shop around for the best deals.

Characteristics of a market economy

Let's go through some of the characteristics of market economies. They are as follows:

  • Private property: Individuals, not just governments, are permitted to benefit from private ownership of firms and real estate.

  • Freedom: Market participants are free to manufacture, sell, and buy anything they choose, subject to government laws.

  • Self-interest: Individuals striving to sell their goods to the highest bidder while paying the minimum for goods and services that they require drive the market.

  • Competition: Producers compete, which keeps pricing fair and assures effective manufacturing and supply.

  • Minimum government intervention: The government has a minor role in a market economy, but it serves as a referee to promote fairness and prevent the formation of monopolies.

Market economy vs. capitalism

A market economy and capitalist economy are two different sorts of economic systems. The names are frequently used interchangeably, but while they have certain characteristics in common, they aren't the same entity. Capitalist and market economies, in a sense, are based on the same law: the law of supply and demand, which serves as the foundation for determining the price and manufacturing of products and services.

A capitalist economy is a system centered on the private ownership and operation of means of manufacturing for profit.

Nonetheless, they are referring to separate things. Capitalism is concerned with the generation of revenue along with the ownership of capital as well as factors of production. A free market economy, on the other hand, is concerned with the exchange of money or products and services.

Furthermore, the system or market might be free only in title: under a capitalist society, a private owner could hold a monopoly in a certain field or geographic region, prohibiting actual competition.

A pure free market economy, on the other hand, is governed totally by demand and supply, with hardly any government oversight. A consumer and a seller in a market economy trade freely and only if they willingly agree on the cost of a product or service.

Market economy advantages and disadvantages

A market economy encourages the production and selling of products and services with limited government control or intervention. Instead of price limitations imposed by the government, a free market economy lets the connections between product supply and customer demand to determine pricing.

Market Economy, Supply and Demand Balance, StudySmarter

Supply and Demand Balance StudySmarter

The figure above is a representation of the delicate balance that supply and demand have in market economies. Since the market dictates pricing, supply and demand are key to the stability of the economy. And the absence of government interference within market economies allows market economies to enjoy a wide variety of liberties, but they also have some significant downsides.

Advantages of a Market Economy

  • Supply and demand are propelled by businesses and consumers: Because a market economy enables the free interaction of supply and demand, it guarantees that the most wanted products and services are manufactured. Customers are prepared to spend the most for the items they desire the most, and businesses will only produce items that generate a profit.

  • Efficiency is fostered by competition: Products and services are manufactured in the most effective manner feasible. Companies that are more productive will profit more than those that are less productive.

  • Profits for innovation: Innovative new items will better suit the demand of consumers than existing products and services. These innovations will spread to other competitors, allowing them to become more profitable as well.
  • Enterprises invest in one another: The most successful firms invest in other leading businesses. This offers them an advantage and leads to higher manufacturing quality.

  • This economic structure generates job possibilities: Economists argue that the market economy benefits not just the purchasing public, but also millions of unemployed individuals. A clothing industry entrepreneur, for example, will require a significant number of staff to get the firm up and running. This implies more employment and fewer people out of work.

Disadvantages of a market economy

  • The disadvantaged are left out of the competition: Competition is the primary driver of a market economy. Consequently, there is no structure in place to provide for individuals who are already at a competitive disadvantage such as elderly people, kids, and those who are unable to work due to mental or physical handicaps.
  • In a market economy, poorer products may emerge: Those against market economies claim that because capitalists are focused on profit, they are more drawn to mass production. Typically, mass-produced items are of inferior quality because capitalists are more concerned in supplying what buyers want at a given time and give little thought to the quality of the things they offer.

  • It has the potential to cause product prices to rise: Businessmen have the authority to dictate the market and product pricing. They can dominate the distribution of commodities and set the prices at which these things are sold.

  • Not everyone can reach their maximum potential: Kids in low-income households, for instance, frequently work in low-wage occupations to assist the family in getting the needed resources to survive. If a market economy was interested with development rather than just self-interest, these kids would be given greater possibilities for schooling and a profession in a subject of interest.

Market economy examples

In a nutshell, market economies are everywhere. Each country contains free-market elements, however there is no such thing as a completely pure free market economy: it is more of an idea than a practical reality. The majority of countries around the world have a mixed economic system.

For example, the United States is frequently seen as a profoundly capitalist country, with an economy that reflects the principles of a free market. Yet, economic analysts frequently do not believe it to be completely pure due to minimum wage laws and antitrust laws, business taxes, and import as well as export taxes.

To learn more about the topic of antitrust laws, head on over to our explanation - Antitrust Laws

For a significant amount of time, Hong Kong was recognized as the country that was closest to being a truly free-market economy. For more than 20 years, it ranked first or second in the 'free market' category on the Heritage Foundation's list1 and is still ranked first in the Fraser Economic Freedom of the World Index.2

However, one may argue that Hong Kong, which has been under Chinese administration since the 1990s, isn't genuinely independent, particularly considering the Chinese government's increased interference in the economy in 2019-20. As a result, it does not appear on the Heritage Foundation's list for the year 2021 at all.

Market Economy - Key takeaways

  • A free market economy and market economy are used interchangeably. Market economy is one in which both private and public ownership of firms is common.
  • Private property, freedom, self-interest, competition, minimum government intervention are the characteristics of a market economy.
  • A market economy is governed by supply and demand.
  • The distribution of available resources for diverse purposes is referred to as resource allocation.
  • Each country contains free-market elements, however there is no such thing as a completely pure free market economy.

Sources:

1. Heritage Foundation, 2021 Index of Economic Freedom, 2022

2. Fraser Institute, Economic Freedom of the World: 2020 Annual Report, 2021

Frequently Asked Questions about Market Economy

A market economy is described as a system in which the production of products and services is determined by the changing demands and capacities of market participants.

A free market economy and market economy are used interchangeably. This economy is one in which both private and public ownership of firms is common.

An example of a market economy is the economy of the United States.

Private property, freedom, self-interest, competition, minimum government intervention

  • Supply and demand are propelled by businesses and consumers
  • There is hardly any government oversight
  • Producers compete in a market economy, which keeps pricing fair and assures effective manufacturing and supply.

Final Market Economy Quiz

Question

What's a market economy?

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A market economy is described as a system in which the production of products and services is determined by the changing demands and capacities of market participants.

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Question

The distribution of available resources for diverse purposes is referred to as ...?

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Answer

Resource allocation

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What's an economy?

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Answer

An economy is a mechanism for organizing the productive and consumptive functions of a society.

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What are 5 characteristics of a market economy?

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Private property, freedom, self-interest, competition, minimum government intervention

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Which of these is not an advantage of a market economy?

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Answer

It has the potential to cause product prices to rise.

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What's an example of a pure free market economy?

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Answer

Each country contains free-market elements, however there is no such thing as a completely pure free market economy

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A market economy is governed by the forces of ______ and ______

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Answer

supply and demand

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What's a capitalist economy?

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A capitalist economy is a system centered on the private ownership and operation of means of manufacturing for profit.

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Are market economy and capitalist economy the same thing?

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No. Although the capitalist and market economies, in a sense, are based on the law of supply and demand, they are referring to separate things. 

Show question

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What's the difference between a market economy and a capitalist economy?

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Answer

Capitalism is concerned with the generation of revenue along with the ownership of capital as well as factors of production. A market economy, on the other hand, is concerned with the exchange of money or products and services.

Show question

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Why is there praise for innovations in a market economy?

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Innovative new items will better suit the demand of consumers than existing products and services. These innovations will spread to other competitors, allowing them to become more profitable as well.

Show question

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How do market economies help decrease the number of people unemployed?

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Answer

In a market economy, a clothing industry entrepreneur, for example, will require a significant number of staff to get the firm up and running. This implies more employment and fewer people out of work.

Show question

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Why are the disadvantaged left out of the competition in a market economy?

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Answer

Competition is the primary driver of a market economy. Consequently, there is no structure in place to provide for individuals who are already at a competitive disadvantage.

Show question

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Why would prices rise in a market economy?

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Because businessmen have the authority to dictate the market and product pricing. They can dominate the distribution of commodities and set the prices at which these things are sold.

Show question

Question

What type of economy is the US?

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Answer

The US is frequently seen as a market economy or a good example of an economy that reflects the principles of a market economy. Yet, economic analysts frequently do not believe it to be completely pure due to minimum wage laws and antitrust laws, business taxes, and import as well as export taxes. 

Show question

Question

Natural resources, capital, and labor are all examples of _________.

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Answer

supply.

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How does competition affect prices?

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Answer

It allows consumers to shop around for the best deal.

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In a market economy, does private property extend to businesses as well as private citizens?

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Yes, businesses can own private property.

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What is the difference between a free market and a free market economy?

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They are the same exact thing.

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A jewelry maker will price his goods as high as the market will allow while driving a shrewd bargain for the best price of materials. Why?

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Out of self-interest.

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What good does government intervention have in a market economy?

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It serves as a referee to promote fairness.

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How can there be a monopoly in capitalism?

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When a private owner holds all the market power in a certain field or geographic region.

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An advantage to a free market economy is...

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That it guarantees that the most wanted products and services are manufactured.

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Why might free markets cause some people to be left out of market competition?

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Answer

Because of the lack of government, there is no structure in place to provide for individuals who are already at a competitive disadvantage such as elderly people, kids, and the handicapped. 

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What is not a disadvantage to free markets?

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Supply and demand are propelled by businesses and consumers.

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What does it mean that "in a free market, not everyone can reach their maximum potential."

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It means that since free markets are focused on self-interest, rather than development, people who might need extra support, won't receive it.

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In a market economy, participants are restricted in what they can buy, unlike in a free market.

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Answer

False. A free market and a market economy are the same things.

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Private property, freedom, self-interest, competition, and significant government intervention are the characteristics of a market economy.


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False. There is minimal government intervention.

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Is there difference between a free market and capitalism?

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Yes, capitalism is concerned with the generation of revenue whereas free markets are concerned with the exchange of money or products.

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Hong Kong is the only nation that is a true free market economy.

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False, there is no country that is 100% a free market economy.

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The majority of countries around the world have a _______ economic system.


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mixed.

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In a market economy, companies that are more productive will profit _____ than those that are less productive.

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Answer

More

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Why will a market economy have more innovation?

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Answer

Because innovative new items will better suit the demand of consumers than existing products and earn more profit.

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Why do successful firms invest in other businesses?

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Answer

Because it offers them an advantage and leads to higher manufacturing quality.

Show question

Question

Why might product prices rise in a free market?

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Answer

Because businesses have the authority to dictate the market and product pricing.

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