Market. Types of Economies

economic resources, economic system, supply, demand, production costs, opportunity costs, planned economy, labor-intensive production, mixed economy

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Market

Economic resources may be classified as material resources (raw materials and capital) and labour resources (labour force and entrepreneurship). Scarcity of resources makes it necessary to save them. As a result, any economic system is trying to find the most effective and efficient ways of utilizing resources for the production of goods and services. The rational solution to the problem brings about the maximum economic growth, full employment, stable prices, equitable distribution of revenues, and social security of the needy.

There are different economic systems in the world today. Many economists argue that free enterprise, or the market economy, is the most effective system, because the businesses are free to choose whom to buy from and sell to and on what terms, and free to choose who to compete with. How can a market economy solve what, how and for whom to produce?

It is done through a market, which is a set of arrangements through which buyers and sellers make contact and business, in which choices concerning the allocations of production, incomes, goods and services are left to countless independent decisions of individual consumers and producers acting on their own behalf.

One of the main laws of the market is the law of supply and demand. For a given market of a commodity, demand shows the quantity that all prospective buyers will be prepared to purchase at each unit price of the good. The law of demand states that the higher the price of a product, the less of it people would be willing to buy. Supply is the relation between the price of a good and the quantity available for sale from suppliers (such as producers) at this price. The higher the price at which the good can be sold, the more of it producers will supply. The higher price makes it profitable to increase production. Thus, the law of supply and demand says that if demand exceeds supply, the price tends to rise and when supply exceeds demand the price tends to fall.

Given the scarcity of resources, the market functions as a rationing device with the price mechanism as its principal mechanism. In free markets, prices direct allocations of inputs of firms that make the most profitable use of them. The price mechanism also guides the decisions of producers concerning the compositions of their output. Finally, the price mechanism also governs the distribution process.

Thus, the market mechanism brings about an allocation of resources that reflects two basic factors: consumer preferences and production costs. The prices which play the coordinating role of the market mechanism are determined through the interaction of demand and supply.