Market Economy – Overview, Features, Characteristics, Advantages and Disadvantages

A market economy can be defined as an economy in which the allocation of resources is determined only by their supply and the demand for them. Market economy can also be defined as an economic system in which economic decisions and the pricing of goods and services are guided solely by the aggregate interactions of a country’s citizens and businesses and there is little government intervention or central planning. To conclude, the market economic system is basically a system whereby private individuals take up the responsibility of allocating resources to the public and relies chiefly on market forces to determine prices.

Countries practicing the market economic system tend to assume that the forces of demand and supply are the main determinants of what is right for a nation’s well-being. They {the countries} rarely experience government interventions such as price fixing, license quotas and industry subsidizations. In reality, the market economy does not exist in pure form as there will always be some sort of government intervention in the economic activities of a particular country.

Features and Characteristics of Market Economy

What makes the market economic system different from others? What are its features? What are its characteristics? It is very simple to indicate.

1. Market Oriented –  First of all and most clearly indicated by the name, the market economic system is “market oriented”. Since the responsibility of resource allocation falls on private individuals, the private individuals would want to utilize the resources available to them to make profit. But before they can make profit they must satisfy consumers by meeting the consumer’s requirements and ward off competition of other products in the same industry.
2. Private Property – Most goods and services are privately-owned. This allows the owners to make legally binding contracts to buy, sell, lease or rent their property. In other words, their property gives them the right to profit from ownership. However, there are exclusions to what is considered private property.
3. Freedom of Choice –  Both producers and consumers are free to produce, sell and purchase goods and services in a free market. The only limitations are the price they are willing to buy the product or sell the product and the amount of income or capital they have available to them.
4. Motive of Self-interest – As said earlier, the concept/motive of a market is for the consumer to be satisfied and for the producer to make profit. Therefore producers try to sell their goods or services to the highest paying consumers {those who can effectively demand their products}, while at the same time paying the least for the goods and services they need. Although the motive seems selfish and sly, it actually benefits the economy in the long run. That’s because this system fairly prices all goods and services inconsistently-due to the forces of demand and supply- but accurately depicts true supply and demand at any given point in time.
5. Competition with substitute products – The forces of competitive pressure keeps prices unstable but moderate, and ensures that goods and services are provided most efficiently. For example, if demand increases for a particular item, prices rise due to the law of demand which states that an increase in demand for a commodity would subsequently lead to an increase in price of that commodity. Once producers/competitors sense additional profit to be made, they start production and increase their supply. This lowers prices to a level where only the best producers remain. This force of competitive pressure also applies to workers, who are competing with each other for the highest-paying jobs. It also applies to consumers in a way, because they are competing for the best products at the lowest price.
6. System of Markets and Prices – A market economy can only function in an efficient market. In an efficient market, all buyers and sellers have equal access, and equal information to make their decisions. Prices rise and fall freely depending purely on the laws of supply and demand. For example, the increase in demand for umbrellas due to a recent change in weather will lead to an increase in supply and a subsequent increase in its price but consumers still have to buy because of the weather. Once the weather changes, consumers cease to buy umbrellas and before long, the price of the same umbrellas would reduce by almost half its original price. This can lead producers to allocate their resources elsewhere.
7. Limited Government – The role of government is simply to ensure that the markets are open and working. For example, it is in charge of national defense so no other country can destroy the markets. It also makes sure that everyone does have equal access to the markets. For example, government exerts penalties on monopolies, which unfairly restrict competition. The government watches to make sure no one is unfairly manipulating those markets, and that all information is distributed equally.

Advantages of Market Economic System

From the characteristics and different market situations mentioned above, it is quite clear that the market economy has some advantages over the other economic systems. The major advantages of the market economy are;

1. Presence of competition – First and foremost, there is serious competition amongst producers. The presence of competition is what the market economic system strives on. Why this is so is because private individuals allocate resources in this economy. Now the only reason why a private individual would want to get involved in resource allocation is so as to make profit from utilizing these resources. Under normal circumstances, a producer can only make profit when his product is doing well in the market. The producer’s product can only do well in the market if consumers prefer to buy his product rather than its homogenous competitors. Now to ensure that the producer is able to attract consumers, they have to go the extra mile to convince consumers that their product is better than their competitors. This can result in companies generating new techniques and innovations so as to capture their target market. Since all companies in a particular industry are vying to attract and satisfy the same consumers, a lot of firms focus on quality of the product rather than quantity because of the competitive nature of the market.
2. Consumer & producer sovereignty – As mentioned earlier, the producer’s motive in this system is to make profit by satisfying consumers. This therefore gives consumers the freedom to purchase whatever good they wish to purchase because it is believed -in this system- that the forces of demand and supply are the main determinants of what is right for a nation’s well-being – even in the case of cigarettes. Although, the consumers have the freedom to purchase whatever good they wish to purchase, they are not the only ones who enjoy this freedom. The producers have just as much freedom as consumers to produce whatever they wish to produce since the resources they are allocating belong to them.
3. Political freedom – Milton Friedman, an American economist, statistician, and author stated that the economic freedom of capitalism is a requisite of political freedom. This simply means that if a country wants to get the best out of this system, government intervention must be very minimal in terms of setting boundaries on what to produce and how much to produce. Once this is done, producers have the license and power to express themselves due to this freedom. However, this seems to be the only advantage the government would not want producers to make use of because it has a tendency of diminishing the power of political leaders.
4. Cost-effective resource allocation – According to Adam Smith, he concluded that the ‘invisible hand of the market’ is responsible for resource allocation in a market system. Capitalism ensures that resources are allocated according to consumer choice. No firm is rewarded for producing goods that people don’t desire so once a product is not doing well in the market, the resources used to make that product are quickly re-allocated.
5. Economic growth – Although it seems hard to believe, the capitalist economic system actually stimulates economic growth when measured by G.D.P, resource utilization or standard of living. Adam Smith suggested that a free market should control production, price and resource allocation because it will stimulate economic growth. It seemed outrageous at the time but statistics show that the increase in global G.D.P overtime is as a result of countries using the modern-day capitalist system.

Disadvantages of Market Economic System

Everything that has its advantages must have its disadvantages and the market economy is no different. Yes, the market economy will guarantee economic growth, healthy competition and consumer sovereignty. But what are the side effects? Why do governments think twice before implementing such a system? Why can’t it be considered the “perfect” economic system since it allocates resources cost effectively? The next few paragraphs would answer that.

1. Social inequality – The common capitalist mantra that “anyone can be rich if they work hard enough” is a fallacy. There’s only so much room at the top. In order to make money, first you have to take it from someone else. This can be done through selling things, taxation or any other means. But this means that the rich cannot exist without the poor. Any way you look at it, there’s never going to be equality under capitalism.
2. Consumer & worker exploitation – We wouldn’t stand for dictatorship in our governments, so why do we stand for it in the workplace? CEOs get paid massive salaries, and award themselves huge bonuses on top of them, while they pay their workers minimum wage. The bosses don’t do the work, they don’t produce the goods we consume, and they merely own the means of production. As for those who do? The workers don’t have any say in how it is controlled.
3. War – Many of the wars fought in recent years have been over profit. In Iraq, the war was largely funded by oil barons, and it was private firms who handled most of the security after the initial invasion. In Libya, western forces intervened when the civil war caused oil supplies to be cut off. They only sided with the rebels because they thought they were the most likely to win. In Iran, military intervention is being threatened over the blocking of trading routes to transport oil.
4. Waste – In a society where resources are not evenly distributed, there is always going to be the wealthy who have an excess of resources. While occasionally these resources are given to the poor, often this excess is wasted. Millions of dollars’ worth of food is wasted by those who have more than they need, while there are many others who desperately need it.
5. Ignorance of basic social needs – There are many basic social sectors like literacy, poverty, public health, water supply, social welfare and social security. As the profit margin in these sectors is low, capitalists will not invest. Hence most of these vital human issues will be ignored in a capitalist system.