Text 12 Market Economy

A market economy is an economy in which prices of things are freely set based on the laws of supply and demand. It is also free from the influence of custom or tradition.  In the real world, however, there is no such thing as a truly free market economy since the governments set limits in order to control the economy. The main characteristics of a market economy are its flexibility and decentralized nature.

A market or capitalist system contains six essential features. Main features of the market economy are: private property, freedom of choice and enterprise, self-interest as the dominating motive, competition, reliance on the price system, a very limited role for government.

Private property is a main feature of the market economy. The owners of the property have the right to own, control and dispose of buildings, machinery, and other natural and man-made resources. Private property provides the right to income from the property in the form of rent, interest and profit.

Freedom of enterprise is freedom to buy and hire economic resources, to organize them, and to sell their products in the markets. Freedom of choice is freedom of workers to enter and leave any occupations. Consumers are free to spend their incomes. Producers choose what to produce.

The motive for economic activity is self-interest. Each unit in the economy tries to do what is best: firms try to get maximum profits (or minimum losses). Owners try to obtain the highest possible rewards. Workers work there where they can have highest wages. Consumers spend their incomes on those things which yield the maximum satisfaction.

Competition is another feature of the market economy and the regulatory mechanism of capitalism. It limits the use of economic power in order to prevent to control a market and exploit the other buyers or sellers.

Price mechanism is the next feature of the market economy. The decisions of producers determine the supply of a commodity; the decisions of buyers determine the price. A change in demand and supply causes changes in market prices. The state plays little or no part in economic activity. The political authority is controlling prices or levying taxation.

While most developed nations today could be classified as having mixed economies, they are often said to have market economies because they allow market forces to drive most of their activities

Questions:

1. What is property?

2. What kinds of property do you know?

3. Do you have private property?

4. Are all units free within the market economy?

5. What does freedom of enterprise mean?

6. What does freedom of choice mean?

7. What do you think self-interest means?

8. Is competition positive or negative feature of the market economy?

9. What causes a change of the market price?

10. There are six main features of the market economy. Can you name them?