Market Economy

Market economy is economy based on the division of labor in which the prices of goods and services are determined in a free price system set by supply and demand.

In a true market economy the government plays no role in the management of the economy. The system is based on private enterprise with private ownership of the means of production and private supplies of capital.

This is often contrasted with a planned economy, in which a central government determines the price of goods and services using a fixed price system. Market economies are also contrasted with mixed economy where the price system is not entirely free but under some government control or heavily regulated, which is sometimes combined with state-led economic planning that is not extensive enough to constitute a planned economy.

Such a system is very attractive at first sight. The economy adjusts automatically to meet changing demands. No planners have to be employed. Firms tend to be highly competitive in such an environment. New advanced products and low prices are good ways to increase sales and profits. Since all firms are privately owned they try to make the largest profits possible. In a free market individual people are free to pursue their own interests.

There are also problems. Some goods would be underpurchased if the government did not provide free or subsidized supplies (for example, health and education). In a market economy there might be minimal control on working conditions and safety standards concerning products and services. It is necessary to have large-scale government intervention to pass laws to protect consumers and workers. Some firms produce goods and then advertise heavily to gain sufficient sales. Besides wasting resources on advertising, they may also duplicate one another’s services. Firms have no confidence in future sales if they are to produce new goods and services

The term market economy is not identical to capitalism where a corporation hires workers as a labour commodity to produce material wealth and boost shareholder profits.