What is a Market Economy?

A market economy is a system wherein demand and supply govern the prices and production of goods¹.

What are the features of a market economy?

In a market economy, most goods and services are privately owned² and the pricing of goods is purely based on the law of supply and demand.

A market economy involves minimal intervention from the government. This allows private players to participate freely, giving rise to more alternatives for consumers.

Competition fosters efficiency and often involves the efficient use of capital, as inefficiencies make players less competitive. In many cases, innovation is rewarded with profits2.

However, competition could marginalize the disadvantaged². The prices reflected in the products may not be affordable for everyone, which could be a deterrent when it comes to goods such as medicines. This kind of market may have several well-established prominent players, making it more difficult for new participants to compete.

Example

Country X’s production of mobile phones is controlled by the government. While the prices of mobile phones are low, the country continues to use outdated technology. Realizing this, the government decides to encourage participation from private players. The country now has access to mobiles from multiple brands. Since these brands are competing for market share, the quality of the product and technology has improved. The move to a market economy created healthy competition, making prices more reasonable for the buyers, who are free to switch brands if the prices do not meet their expectations.

References

1. Market Economies. National Geographic.

2. What is the Market Economy? The Balance.

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