What is Market Economy?

Posted by Amy :)

Market economy primarily depends on the supply and the demand of a product. The decision regarding the pricing, investment, production and distribution of a product is made according to the demand of the product in the market and the supply being provided. Market economy refers to an economy in which all the above mentioned decision are taken as per two factor –  demand and supply. Market economy is in contrast with the planned economy. In case of planned economy, the production decisions does not depend on factors like production and decisions but are already decided as per the plan of the production.

Market economy can range from a free market to a regulated market conditions. Market economies however do not exist in pure form as the society and the government regulates them to a great extent. Most of the market economies are better referred as mixed economies as they include some degree of economic planning and state directed activities associated with them. Free market is often used synonymously as market economy but it might also refer to free market anarchism.  Market economy ignores the presence of private property in the means of production. It can consist of various cooperatives, collectives or autonomous state agencies use the free system to acquire and exchange capital goods among them. Market socialism has many variations and involve employee owned enterprises that are based on self management and operates in markets and modules that involve public ownership.

Sometimes, the term market economy might be misleading like in America where mixed economy is prevalent but is rooted in market economy. Different economists and businesspersons have different perspectives to how strong a role the government should have in guiding the market economy and to the inequalities, the market produces. Market economies consider that the market forces like the demand and supply of a product are the primary determinants to analyze the market condition and define what is good or bad for the nation. These economies are not commonly intervened by the government through price fixing, industry subsidization and license quotas.

Many of the countries that have mixed economies are also known as market economies for the reason that they consider market forces to define most of their business states and allow the government intervention only to a small extent that is required for proper stability of the country economy. This system if a system of choice for the market place all around the globe but the extent of government intervention is still a matter of debate. No exact level of government intervention is defined that would allow an efficient economic operation of a nation.

Market economy is connected with large political ideals too. There are many theories on market economy proposed by many economists. However, Milton Friedman is one of those economists who talk on this. He advocates that free-market economy is an essential requirement for a free political system. The extent to which the government brings effect in the free market is directly related to the extent of political and civil freedom enjoyed by the citizens.

Author Bio: I am William a finance blogger, freelancer and copyright editor from NY. Check out my site at economicrisis.com

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