Market economy: concept, main forms of the economic system and their models

2024 Author: Henry Conors | [email protected]. Last modified: 2024-02-12 02:39

The market economy is an economic system. It synchronizes the actions of individual subjects in the market. In the modern world, the structure of the market economy is a reflection of the partial regulation of the market by the state in its interaction with other entities.

Definition

The market economy is a special version of the economic order, which contains elements of planning and command at the same time. This is a kind of economy where the activities of economic entities are carried out without state intervention. Economic entities, setting goals and methods of implementation, play a key role in their formation. A market economy means a situation in which the mechanism of market prices changes depending on the existing supply and demand. Its general principle is freedom of competition.

Development conditions

The work of the market depends on many conditions of the market economy. Among them:

• item exchange processes;
• division of labor;
• economic separation of producers;
• means of determining the value of manufactured products;
• place of sale of products;
• impact on the course of non-economic institutions and organizations.

In a market economy, decisions about production and consumption are made through the market. The entire economy is made up of interdependent markets.

Operation concept

The market system of the economy is a form in which economic 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 only regulator), which forces the economic activity of subjects to serve the goals of society as a whole. Factors of production are privately owned and subject to market mechanisms. Prices for goods and services are quoted on the market, and the market determines the quantity of these products and the volume of consumption.

Economic entities operate freely. The state plays a limited role in protecting private property and ensuring the safety of its citizens. The main regulator and coordinator of the economic processes of the 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 ownership also promotes effective competition among enterprises. Strong incentives include: production optimization and factor managementproduction. In pursuit of maximum profit, entrepreneurs try to produce more and better than their competitors, and as cheaply as possible.

Features

The first of the two essential features of a market economy is the dominance of private ownership of the factors of production. In other words, in this case, the factors of production are mostly privately owned. At present, the main type 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 at the present time means the dominance of capitalist joint property. This dominance is that:

• main part of production is produced in countries of developed capitalism by large joint-stock enterprises;
• most of the workforce is employed in them;
• most of the profits come from these businesses.

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 incomes, supply and demand of various goods, affecting the purchase and sale transactions concluded by market participants. Key Features:

• dominance of private property and freedom in the transfer of private property rights (the smaller the amount of state property and the greater the freedom to transfer property rights, the lessmarket restrictions);
• freedom to do 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 for the development of the market for products and services);
• existence 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 the development of, for example, the securities market or the investment goods market);
• integrity of the market, that is, the mutual dependence of individual market segments, for example, the market for goods and services, money, foreign exchange (insufficient development of some of them negatively affects the functioning and development of others).

Benefits

The main advantages of a market economy are:

• trend towards rational use of economic resources;
• effective motivational system;
• major innovations in the economy;
• financial discipline of enterprises associated with competition and the principle of self-financing of economic activity;
• trend towards self-determination of market equilibrium;
• more economic flexibility;
• good offer.

Striving for maximum profit, entrepreneurs try to produce more and better than their competitors, and as cheaply as possible. This requires finding the cheapest combinations of factors of production andimplementation 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 to produce what the buyer wants.

Flaws

Unfortunately, there are also disadvantages of the 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.

It is impossible not to notice the problem of unprofitable factories that used extensive public assistance in the former system, and today in an era of widespread competition go bankrupt, as a result of which untrained people are fired, the number of unemployed increases, who often have feelings of injustice.

Efficiency

The efficient economy of a market economy in equilibrium maximizes overall profitability. Therefore, for the economy as a whole to be efficient, all markets together, as well as each individual, must maximize the overall result. Well-functioning markets owe their efficiency to two of the most important characteristics: property rights and prices, which act as market signals.

Prices are the most important signals in a market economy because theyshow 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 can be inefficient:

• no property rights;
• Inadequacy of prices as market signals.

If the market is inefficient, we are dealing with a so-called failure.

Main causes of market failure:

• avoiding win-win deals (caused by an attempt to get a larger surplus of one of the parties);
• side effects (miscalculated);
• problems arising from the nature of the goods.

The state and its role

In exceptional situations, the market economy takes into account state intervention in its work. An example would be natural disasters in agriculture, economic depressions. 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 intervention cannot be related to foreign trade, foreign exchange or capital market issues;
• The scope and nature of the assistance offered should be respected so as not to disrupt the overall functioning of the market economy.

Key actors

The market economy has an extremely complex nature. And all thanks to the presence of a huge number of functioning elements. The main subjects of the market economy are:

• households;
• farms;
• enterprises;
• commercial banks;
• exchanges;
• central bank;
• government institutions.

In order for these organizations to function in the economy, they must be participants in the following markets:

• commodity markets (goods and services);
• markets for factors of production, e.g. land, labor;
• financial markets, e.g. securities markets, foreign exchange markets, money market.

Depending on the type to which the market belongs, participants in economic life act as buyers, creating the demand side of the market, or sellers (they create the supply side of the market).

Features

The main features of the development of a market economy are:

• dominance of private property;
• no restrictions on decisions regarding quantity and production method;
• presence of a price mechanism: price as a result of a market game;
• small government intervention;
• tough competition between entities;
• functioning institutions aimed at supporting the market - insurers, banks.

Model

Market economy and market relationsbetween producers and consumers form the model of the economy. Its main assumptions:

• model refers to a market economy under capitalism, i.e. most of the resources belong to private property;
• the market is divided into commodity and resource markets;
• the decisive role is played by two economic entities - households and enterprises.

The most important steps in the formation of such a model:

• households have resources to sell in the enterprise market;
• enterprises use a variety of resources to produce goods;
• Products produced are sold to households.

Conclusion

A market economy is a type of economy in which decisions regarding the volume and mode of production are made by economic entities (households, farms, enterprises, financial institutions, the state), guided by their own interests and developing in accordance with the principles of rational management.

These decisions are based on market information, including prices of goods and services, factor prices, wages, interest rates, rates of return and securities exchange rates, foreign exchange rates.

The dominant form of the modern market economy is the capitalist economy. However, markets are not unique to capitalism, and there is nothing intrinsic to capitalism about markets. Thatthere is a mistake to use the term "market economy" as a synonym for capitalism.

Summarizing, the most important advantage of a market economy is competition, which results in consumers getting only the best and cheapest products, because that's what the demand is for.