free to seek any jobs for which they are qualified.
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Characteristics of a Market Economy
By Cindy Grigg
A market economy is a type of economic system where supply
and demand regulate the economy, rather than government
intervention. A true free market economy is an economy in which
all resources are owned by individuals. The decisions about the
allocation of those resources are made by individuals without
government intervention. There are no completely "free-enterprise"
or market economies. The United States has more characteristics of
a market economy than a command economy, where a government
controls the market. In a market economy, the producer gets to
decide what to produce, how much to produce, what to charge
customers for those goods, and what to pay employees. These
decisions in a free-market economy are influenced by the pressures
of competition, supply, and demand.
A market economy is driven by the motive of self-interest.
Consumers have the motive of trying to get the greatest benefits
from their budgets. Entrepreneurs try to get the highest profits for
their businesses. Workers try to get the highest possible wages and
salaries. Owners of capital resources try to get the highest possible
prices from the rent or sale of their resources. This "invisible hand"
of self-interest is the driving force of a market economy.
Competition is another important characteristic of a market
economy. Instead of government regulation, competition limits
abuse of economic power by one business or individual against
another. Each competitor tries to further his own self-interest. This
economic rivalry means that buyers and sellers are free to enter or
leave any market. It also means that buyers and sellers are acting
independently in the marketplace. When businesses compete for
customers, they want to sell their goods or services at the lowest
possible price while still earning a profit for themselves. Consumers
compete for goods and services. If the supply of a needed good or
service is low, the consumer must pay a higher price. Consumers
must compete to get goods or services by paying more or going out
of their way to buy the products they need or want.
One of the most important characteristics of a market economy,
also called a free enterprise economy, is the role of a limited
government. Most economic decisions are made by buyers and
sellers, not the government. A competitive market economy
promotes the efficient use of its resources. It is a self-regulating and
self-adjusting economy. No significant economic role for
government is necessary. However, a number of limitations and
undesirable outcomes associated with the market system result in an
active, but limited economic role for government.
A system of markets and prices working together are the
structure of a market economy, not the central planning by
government. A market brings buyers and sellers together. The
wants of buyers and sellers are registered on the supply and demand
sides of various markets. The outcome of these choices is a system
of product and resource prices. Prices are the guideposts on which
buyers and sellers make and revise their free choices in furthering
their self-interests.
In a market economy, almost everything is owned by individuals
and private businesses- not by the government. Natural and capital
resources like equipment and buildings are not government-owned.
The goods and services produced in the economy are privately
owned. This private ownership, combined with the freedom to
negotiate legally binding contracts, permits people to obtain and use
resources as they choose.
The advantages of a market economy are many. Competition
insures greater quality and lower prices for consumers. Individuals
are encouraged to take business risks to further their own economic
interests, which benefit the economy as a whole. Economists
Friedrich von Hayek and Milton Friedman believe that the more
economic freedom that is available, the more civil and political
freedoms a society will enjoy.
A market economy has freedom of choice and free enterprise.
Private entrepreneurs are free to get and use resources and use them
to produce goods and services. They are free to sell these goods and
services in markets of their choice. Consumers are free to buy the
goods and services that best fill their wants and needs. Workers are
Some disadvantages are that only those people with resources
may take part in a market economy. There is often an income gap.
People with the most resources (money) keep getting richer, while
people with few resources get poorer. Some services, like railroads
and airlines, have problems offering their services while maintaining
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low prices. In these cases, government may step in to keep the
services available at a reasonable cost to consumers because the
service benefits the society as a whole. Some critics of market
economies say that greed is the driving principle. They think that
markets should not be allowed to profit while causing potential harm
to the environment by using up all available resources and polluting
the planet.
Characteristics of a Market Economy
Questions
1. What is a market economy?
A. an economic system with only the most educated having
the power
B. an economic system regulated by supply and demand, not
the government
C. a government-regulated economic system
D. an economic system taking from each according to ability
and giving to those in need
2. Who makes the decisions in a market economy?
A. the government
B. the educated
C. the wealthy
D. buyers and sellers
3. Who owns most of the resources, equipment, buildings, goods,
and services in a market economy?
A. government
B. the poor
C. the wealthy
D. individuals and private businesses
4. What happens with "free enterprise"?
A. Private entrepreneurs are free to get and use resources.
B. Entrepreneurs are free to produce goods and services and
sell them at a price they choose.
C. Sellers are free to sell in markets of their choice.
D. Consumers are free to buy any goods and services they
choose.
E. Workers are free to work wherever they choose.
F. all of the above
5. What is the driving force of a market economy?
A. the richest citizens bearing the burden of taxes and
government services
B. a motive of self-interest
C. a motive of helping others
D. wanting to put government first
6. What pressure limits the abuse of economic power in a market
economy?
A. price
B. competition
C. supply
D. demand
7. Instead of government planning, what structures a market
economy?
A. consumers and producers
B. fair business practices
C. markets and prices
D. types of money available
8. Which of these is NOT an advantage of a market economy?
A. more choices in goods and services for consumers
B. individual risk resulting in higher gains for individuals
and society
C. lower quality and higher prices
D. more civil and political freedoms
Discuss some disadvantages of a market economy.
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Do you feel government should have a bigger role in the U.S.
economy? Explain why or why not, giving specific examples.
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List the main characteristics of a market economy.