A market economy is an economic system. It synchronizes the actions of individual actors in the market. In the modern world, the structure of a market economy is a reflection of the partial regulation of the market by the state in its interaction with other entities.
Definition
A market economy is a special variant of the economic order that contains elements of planning and command at the same time. This is a kind of economy where the activities of business entities are carried out without government intervention. Economic entities, setting goals and methods of implementation, play a key role in their formation. Market economy means a situation in which the mechanism of market prices changes depending on existing demand and supply. Its general principle is freedom of competition.
Development conditions
The operation of the market depends on many conditions of a market economy. Among them:
- exchange processes;
- division of labor;
- economic division of producers;
- means for determining the value of manufactured products;
- place of sales;
- influence on the course of non-economic institutions and organizations.
In a market economy, decisions on production and consumption are made through the market. The entire economy consists of interdependent markets.
Functioning concept
The market economy system is a form in which business entities are guided by their own goals and try to achieve maximum benefits without resorting to help or protection from the state. What, how and for whom to produce, is the result of the action of the “invisible hand of the market” (as the sole regulator), which forces the economic activity of entities to serve the goals of society as a whole. Production factors are privately owned and subject to market mechanisms. Prices for goods and services are indicated on the market, and the market determines the quantity of these products and the volume of consumption.
Business entities operate freely. The state plays a limited role in protecting private property and ensures the safety of its citizens. The main regulator and coordinator of the economic processes of a market economy is the market itself. Which is a mechanism of interaction that affects the behavior of business entities, and determines the distribution of economic resources. Private property also promotes effective competition between enterprises. Strong incentives include: production optimization and rational use of production factors. Striving for maximum profit, entrepreneurs try to produce more and better than their competitors, and as cheaply as possible.
Characteristics
The first of two essential features of a market economy is the dominance of private ownership of factors of production. In other words, in this case, the factors of production are for the most part an object of private property. Currently, the main form of private ownership of factors of production in highly developed countries is capitalist ownership, which occurs in many different forms. Thus, the dominance of private property now means the dominance of capitalist joint ownership. This dominance is that:
- the bulk of production is made in countries of developed capitalism by large joint-stock enterprises;
- most of the workforce is employed in them;
- most of the profits came from these enterprises.
The second main characteristic of a market economy is the distribution of economic resources. The main element of this mechanism is the relationship between prices and revenues, demand and supply of various goods, affecting sales transactions concluded by market participants. Main characteristics:
- the dominance of private property and freedom in the transfer of private property rights (the smaller the volume of state property and the greater the freedom of transfer of property rights, the less restrictions on the market);
- freedom to conduct business (the fewer administrative restrictions, norms and rules, for example, in the field of production, services or trade in products and factors of production, the higher the chances of developing a market for products and services);
- the presence of effective institutions that serve the market (without securities committees, stock exchanges, banks, legal and investment consulting firms, insurance companies and brokerage firms, it is difficult to imagine development, for example, the securities market or the market for investment goods);
- market integrity, that is, the interdependence of individual market segments, for example, the market of goods and services, monetary, foreign currency (insufficient development of some of them negatively affects the functioning and development of others).
Benefits
The main advantages of a market economy are:
- tendency to rational use of economic resources;
- effective motivation system;
- major innovations in the economy;
- financial discipline of enterprises related to competition and the principle of self-financing of economic activity;
- tendency to self-determination of market equilibrium;
- greater flexibility of the economy;
- good suggestion.
Striving for maximum profit, entrepreneurs try to produce more and better than their competitors, and as cheaply as possible. This requires the search for the cheapest combinations of factors of production and the introduction of cost-effective technological and organizational innovations that directly depend on the desire of consumers.
The main factor is profit, which is the driving force of human activity and forces us to produce what the buyer wants.
disadvantages
Unfortunately, there are also disadvantages of a market economy, which can also be called side effects, mainly in the form of unemployment. It is directly related to the fact that entrepreneurs, taking into account economic accounting, hire as few workers as possible, which at the same time requires universality, leads to the division of society into lower, middle and upper classes.
One cannot but notice the problem of unprofitable factories, which widely used state aid in the previous system, and today, in the era of widespread competition, they are becoming bankrupt, as a result of which unprepared people are dismissed, the number of unemployed, who often have feelings of injustice, is increasing.
Efficiency
An efficient economy of a market economy in equilibrium maximizes overall profitability. Therefore, in order for the economy as a whole to be effective, all markets together, as well as each individual, must maximize the overall result. Effectively functioning markets owe their effectiveness to the two most important characteristics: property rights and prices, which play the role of market signals.
Prices are the most important signals in a market economy, because they show information about the costs of other people and their willingness to pay for this product. However, it happens that the price is not a valid signal.
There are two main reasons why a market economy may be ineffective:
- no property rights;
- price inadequacy as market signals.
If the market is inefficient, we are dealing with the so-called failure.
The main causes of market failure:
- prevention of mutually beneficial transactions (caused by an attempt to get a larger surplus of one of the parties);
- side effects (incorrectly calculated);
- problems arising from the nature of the goods.
The state and its role
In exceptional situations, a market economy takes into account state intervention in its work. Examples include natural disasters in agriculture and economic depression. The use of this information requires careful attention and the following rules:
- government intervention cannot include activities closely related to price mechanisms;
- the use of the proposed assistance from the state should bring any results, changes for the better;
- government interventions cannot relate to the problem of foreign trade, the foreign exchange market or the capital market;
- the scope and nature of the assistance offered should be observed so as not to disrupt the overall functioning of a market economy.
Principal subjects
A market economy is extremely complex. And all thanks to the presence of a huge number of functioning elements. The main subjects of a market economy are:
- households;
- farms;
- enterprises;
- commercial banks;
- Exchange
- central bank;
- government agencies.
In order for these organizations to perform functions in the economy, they must be participants in the following markets:
- commodity markets (goods and services);
- markets for factors of production, for example, land, labor;
- financial markets, for example, securities markets, foreign exchange markets, money market.
Depending on the type to which the market belongs, participants in economic life act as buyers, creating a side of demand in the market, or sellers (they create a side of supply in the market).
Features
The main features of the development of a market economy are:
- dominance of private property;
- there are no restrictions when making decisions regarding the quantity and method of production;
- the presence of a price mechanism: price as a result of a market game;
- small government intervention;
- fierce competition between subjects;
- the functioning of institutions aimed at supporting the market - insurers, banks.
Model
Market economy and market relations between producers and consumers form a model of the economy. Its main assumptions:
- the model refers to a market economy under capitalism, that is, most of the resources belong to private property;
- there is a division of the market into commodity and resource markets;
- the decisive role is played by two business entities - households and enterprises.
The most important stages of the formation of such a model:
- households have resources available for sale in the enterprise market;
- enterprises use a variety of resources to produce goods;
- manufactured products are sold to households.
