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| 26th February 2017
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Definition: A market economy is when competition from free enterprise makes economic decisions. It allows the laws of supply and demand to direct the production of goods and services. Supply includes natural resources, capital, and labor. Demand includes purchases by consumers, businesses and the government.
Producers sell their wares at the highest price consumers will pay. At the same time, shoppers look for the lowest prices for the goods and services they want.
Workers bid their services at the highest possible wages that their skills allow. Employers seek to get the best employees at the lowest possible price.
Capitalism requires a market economy to set prices and distribute goods and services. Socialism and communism use a command economy to set a central plan. Market economies evolve from traditional economies. Most societies in the modern world have elements of all three types of economies. That makes them mixed economies.
Six Characteristics of a Market Economy
Four Market Economy Advantages
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Four Market Economy Disadvantages
The key mechanism of a market economy is competition. As a result, it has no system to care for those who are at an inherent competitive disadvantage. That includes the elderly, children and people with mental or physical disabilities.
Second, the caretakers of those people are also at a disadvantage. Their energies and skills go toward caretaking, not competing. Many of these people might become contributors to the economy's overall comparative advantage if they weren't caretakers.
That leads to the third disadvantage. The human resources of the society may not be optimized. For example, a child who might otherwise discover the cure for cancer might instead work at McDonald's to support her low-income family.
Fourth, the society reflects the values of the winners in the market economy. That's why a market economy may produce private jets for some while others starve and are homeless. A society based on a pure market economy must decide whether it's in its larger self-interest to care for the vulnerable. If it decides it is, the society will grant the government a significant role in redistributing resources. That’s why there are so many mixed economies. Most so-called market economies are mixed economies. (Source: Louis Putterman, Markets vs. Controls, Brown University.)
Market Economy Examples
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