Text 3. The market economy

Before you read discuss these questions with your partner:

1. Do you think most countries have a market which is free from government management?

Have you ever walked through a busy street market? People push their way through crowds of others in order to reach the stalls first. The air is full of deafening shouts. Stall owners yell to advertise their goods. Buyers cry out their orders. It’s hard to imagine, but behind this noisy confusion is a very logical economic theory: the market economy.

The market economy is sometimes called the free market. A free market is not controlled in any way by a government. It is also free from the influence of custom or tradition. In a free market, the only reason why things are bought and sold is because there is a demand for them. Prices for goods and services are simply what people are prepared to pay. The market economy is not really controlled by anyone. It controls itself.

The street market where we began has many of the characteristics of the free market. Customers arrive at the market with a shopping list of things they need. They also come with an idea of how much they are prepared to pay. Stall owners sell what customers demand, and try to get the highest price they can for it. Supply and demand control what is on the market and how much it sells for. In the wider economy, we are all customers, and the stall owners are like companies.

The role of the company in the free market is to supply what people want. However, companies need an incentive. The incentive is profit. There are two ways for companies to make a profit. The first way is to raise their prices. The second way is to reduce their production costs. And this brings us to two more features of the market economy: competition and technology.

Competition exists in a free market because, theoretically, anyone can be a producer. This means that companies have to compete with each other for a share of the market. Competition is good for consumers because it helps to control prices and quality. If customers aren’t happy with a product or service, or if they can’t afford it, they will go to a competitor.

Technology exists in a free market because producers need ways to reduce their costs. They cannot buy cheaper raw materials. Instead, they must make better use of time and labour. Technology is the use of tools and machines to do jobs in a better way. This helps companies produce more goods in less time and with less effort. The result: more profit.

People often think that most economies are free markets. However, at the macroeconomic level, a truly free market economy does not exist anywhere in the world. This is because all governments set limits in order to control the economy. Some governments set many limits, other governments set very few, but they all set some. For this reason, a true market economy is only theoretical. Nevertheless, many of the features of the market economy do exist in most societies today.

Task 1. Read the text again and answer these questions:

1) Who controls a market economy?

2) Who decides what products are for sale in a free market?

3) What do companies want?

4) Why is competition a good thing?

5) Why does technology exist in the market economy?

6) Why are there no true market economies in the world today?

Task 2. Complete each sentence with a word or phrase from the list:

advertise afford competition controlled costs incentive limit

prepared profit raise reduce role street market theoretical

- Every Saturday this road becomes the local _________ where people come to buy fruit and vegetables.

- Business _________ their products in the media to attract more customers.

- My _________ in the business is to meet customers and find out what they want.

- Making money is the main _________ to work.

- I bought this old camera for €650 and sold it for €75. That’s €25_________.

- If there’s only one producer in the market, there is no _________.

- Production _________are the amount of money companies spend to make a product.

- The idea that life exists on other planets is _________. Nobody knows for sure.

- A _________ economy is one where a government decides what can be bought and sold and/or how it is done.

- The speed _________on this road is 90 kilometers per hour.

- When there is a demand we _________ prices but we _________ them if we want to sell something quickly.

- I can’t_________ that car – it’s far too expensive.

- People are _________ to pay a lot for services if they are of a good quality.