Meaning Of Market Economy A market economy is an economic system that resolves basic economic problems mainly through the market mechanism.
- What Is Meaning Of Market Economy?
- Features Of Market Economy
- Benefit of Market Economy
- Disadvantages of Market Economy
- FAQs Meaning Of Market Economy
What Is Meaning Of Market Economy?
A market economy is also known as a capitalist economy free market economy or laissez-faire economy. It is an economic system that resolves basic economic problems (i.e., what, how, and for whom to produce) through the interaction between demand and supply. There is no government intervention in economic activities.
Professor Loucks states, “Capitalism is a system of economic organization featured by the private ownership and the use for private profit of man-made and nature-made capital.”
From this definition, it is clear that under the capitalism or free market economic system all means of production such as farms, factories, mines, transport, etc. are owned and controlled by private individuals and firms. Those who own the means of production are free to use them in any way they like with a view of making profits. Everybody’s free to choose any business or job he likes.
There are free market economies in developed countries such as the United States, the United Kingdom, and Japan. The industrialization and economic development of these countries took place under conditions of free market or capitalism.
Also Check : 8 Features of Market Economy
Features Of Market Economy
The Main Features Of Market Economy are as Follows:
1. Private property: The right of private property is a major feature of market economy. It means that productive resources such as land, factories, mines etc.
2. Freedom of choice:There is freedom of choice in market economy. It means a firm is free to decide what to produce and what production method to use.
3. Competition: In the free market economy, competition exists between sellers to attract customers, among the workers to get jobs and among the buyers to obtain goods to satisfy their wants. Competition promotes best use and efficient allocation of resources in the free market economy.
4. Consumers’ Sovereignty : Under the market economy, consumer is supposed to be supreme and is compared to be a king. The goods and services are produced according to the demand of the consumers.
5. Self-interest: The free market economy is based on the principle of self- interest. It means that individuals should be free to do as they wish. Each unit in the economy attempts to do what is best for itself. Firms act in such a way which leads to maximum profits or minimum losses.
6. Market mechanism: The free market economy functions through ‘market- mechanism’. It means that economic problems are solved through the operation of demand and supply forces which determine equilibrium prices in the market.
7.Limited role of government: Since the free market economy functions through market mechanism, there is obviously little role for the government to play.
8. Profit motive: In the free market economy, economic activities are undertaken with the aim of earning profit.
Also Check : 7 Advantages of Market Economy
Benefit of Market Economy
The following are the main benefit of Market Economy.
1. Economic efficiency: The competition among producers inspires every producer to produce cheaper and better quality goods.
2.Better standard of living:The persons of all income groups enjoy a better standard of living in a market economy.
3.Efficient use of Economic resources: In a market economy, wastage of any economic resource means losses. At the same time, efficient use of economic resources increase production and profits.
4. Incentive to work: Everyone gets adequate incentives to work in a market economy. Ownership of private property, laws of inheritance and hope for profits and better wages inspire everybody to work hard and earn more and more income under market economy
5.Economic freedom: Economic freedom is the basis of market economy. There is a freedom of consumption, production and enterprises. Everybody’s free to spend on anything and in any way. There is a freedom to save and invest up to any extent.
6. Flexibility and automatic operation: A market economy is a flexible economy and changes itself quickly as per circumstances.
7. Rich variety of good and services: A consumer is a king.Goods and service are produced as per his choice and liking.
Disadvantages of Market Economy
Market Economy has been severely criticized by many economists on the following Grounds.
1.Economic instability: The main drawback of a market economic system is that it does not guarantee economic stability. In the lack of any external control, this economy is subject to the frequent ups and downs in the levels of production, income, employment, prices, trade, etc
2.Economic inequality: Another major defect of market economy is the increase in unequal distribution of income and wealth. The more efficient and cunning producers accumulate large amounts of wealth and property.
3.Class struggle: Another defect of market economy is that it divides the entire society into two classes the rich and the poor, or the owners (employers and employees) and workers, or haves and haves-not. These two classes always fight with each other because of the clash of their interests.
5.Failure of market: There is a wasteful competition in a market economy. A large sum of money is wasted on competitive advertising of a product in a newspaper, on radio and T.V., in cinema, etc.
4. Wasteful competition mechanism: In an underdeveloped economy, market mechanism cannot guarantee rapid and sustained economic growth and removal of poverty and unemployment. Free market forces cannot guide private enterprises to invest in the spheres of national importance such as infrastructure, capital goods industry etc.
6. Monopoly tendencies: A major defect of a market economy is that the monopoly tendencies are developed in the country. Gradually competition declines and the large firms try their level best to eliminate the rival firms through various means and emerge as big monopoly houses.
7.Business fluctuations:All major countries of market economic system of the world are suffering from the problem of business fluctuations.
8. Exploitation of workers : Another defect of a market economy is that the workers or labourers are exploited by the markets. Therefore, it causes a good deal of human misery and sufferings. The workers are paid less than their marginal productivity and are paid wages just sufficient for their bare survival.
In brief, a Meaning Of Market Economy system gives more importance to the private ownership of property, competition, consumer sovereignty, and least government interference in the economic activities. But at the same time, it contains certain evils too. Many welfare states have taken certain measures to curb these evils through certain welfare measures. In this way, the role of government is also increasing.
FAQs Meaning Of Market Economy
How does a market economy work?
In a market economy, individuals and businesses make economic decisions based on their self-interest, and prices are set through the forces of supply and demand.
What is the role of government in a market economy?
Governments in market economies typically play a limited role, focusing on enforcing property rights, ensuring fair competition, and providing essential public goods and services.
What are the advantages of a market economy?
Market economies tend to promote innovation, efficiency, and consumer choice. They can also foster economic growth and individual freedom.
What are the disadvantages of a market economy?
Market economies can lead to income inequality and may not adequately address certain social and environmental concerns without government intervention.
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