How a Market Economy Work? Advantages of a Market Economy

Theme: «Market Economy»

1. 
   Theory of Market Economy
   

2. How a Market Economy Work?

3. Advantages of a Market Economy

4. Disadvantages of a Market Economy

5. Examples of countries with a Market Economy System

1. 
   Theory of Market Economy
   

A market economy is described as a system in which the production of goods and services is determined by the changing desires and capacities of market participants. It enables the market to function freely in line with the law of supply and demand, which is set by individuals and corporations rather than governments.
The market economy principle states that producers and sellers of goods and services will provide them at the maximum price that consumers are prepared to pay for goods or services. A natural economic equilibrium is reached when the level of supply equals the level of demand.
Market economies use supply and demand dynamics to establish the proper prices and quantities for the majority of commodities and services in the economy. Entrepreneurs gather production inputs (land, labor, and capital) and combine them with workers and financial backers to generate goods and services for consumers or other firms to purchase. Buyers and sellers willingly agree on the parameters of these transactions based on consumer preferences for specific commodities and the income that businesses expect to make on their investments.
Entrepreneurs allocate resources across different businesses and production processes based on the profits they aim to generate by generating output that their consumers value more than what the entrepreneurs spent for the inputs. Entrepreneurs who succeed are rewarded with revenues that can be reinvested in future ventures, while those who fail must either learn to improve through time or go out of business.
Classical economists such as Adam Smith, David Ricardo, and Jean-Baptiste Say provided the theoretical foundation for market economies. These classically liberal free market supporters felt that the “invisible hand” of the profit motive and market incentives often drove economic decisions in more productive and efficient directions than government economic planning. They felt that government action frequently resulted in economic inefficiencies that harmed people.