The Characteristics of Market Economy

The market economy, also called free market economy or free enterprise economy is, probably, the best substitute for economical freedom. Among history we had many examples of different types of systems, like socialist, capitalist or planned economy but the one who seemed to function most was the market economy. People embrace it because it gives them the freedom, as a producer, of choosing what goods to produce, how, when and to whom to sell them, and as a consumer, it offers the opportunity also to choose between competing goods and services and freedom as a worker to choose among different jobs or careers. Basically, it goes by the principle of competition, where every seller has to lay out his merchandise at a price established by the market itself.

The principles of market economy

1. Free markets  the production and distribution of goods and services takes place through the mechanism of free markets

In a market economy, the price of each product is established according to a mutual consent between the buyer and the seller, in opposite to the planned economy where the price, quantity and distribution of products are set by the government, which practically controls the market.

2. Free price system  the prices are set by the interchange of supply and demand, meaning the matching of the sellers asking prices with the buyers bid prices, as a result of subjective value judgment.

3. The interplay of supply and demand  The theory of supply and demand is important in the functioning of a market economy in that it explains the mechanism by which many resource allocation decisions are made.

Basically, in a market economy the relation between the supply and the demand establishes its direction, the prices and the eventual risks both parties may take when engaging in an interchange process.

4. Producers self-interest - By following their own self-interest in open and competitive markets, consumers, producers, and workers are led to use their economic resources in ways that have the greatest value to the national economy -- at least in terms of satisfying more of people's wants.

It has been proved among the years that the production quality and quantity reaches its best when people produce not only for the common good but, especially, for their own good. Self-interest serves as an important factor which motivates the producers to use their resources more efficient, in the purpose of expanding their enterprise or simply raising more money.

5. No government intervention  &the role of government is not to take the place of the marketplace, but to improve the functioning of the market economy. Further, any decision to regulate or intervene in the play of market forces must carefully balance the costs of such regulation against the benefits that such intervention will bring.

In a market economy, the government interferes only to prevent market failure, maintain stable currency and thus combating the inflation, and protect market competition and the consumers. Nevertheless, its intervention must be limited, in order not to influence the two parties  the buyer and the seller, nor the market price or products distribution.

6. Competition  In a free market economy, competition works to ensure the efficient and effective operation of business. Competition also ensures that a firm will survive only if it serves its customers well.