Market Economy Definition Market Economy Explained Types of Market Economy

Invisible Hand in a Market-Based Economy
As mentioned, the prices of goods or services directly depend on demand and supply. So, the scarcer a good or service is, the higher its demand and price. Therefore, demand and supply form the invisible hand responsible for the sustainability of the trade in the ME.
The concept of the invisible hand in economics was the brainchild of Adam Smith, which assumed that the selfish interest of businesses and individuals would lead to the betterment and sustainment of the economy. Also, without the invisible hand, the trade would collapse as:

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  If the demand for goods or services increases without the rise in supply, the price increases.
  
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  If an increase in demand does not follow the rise in supply, the price falls.
  

Hence, the invisible hand forms the backbone of the market-based economy.
Types of Market Economy
In market economies, there are six major types of markets. They are as follows:
#1 – Perfect Competition
Perfect Competition is an ideal where:

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  Every firm has the same products to sell
  
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  The price of products is not influenced by market share
  
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  New entrants do not face any barrier to entry into the market
  
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  There is transparency in product information with the consumers
  
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  The companies do not play any role in determining prices
  

#2 – Monopoly
It is a market system where there is no competition between sellers, and only one seller sells the product to the public.
#3 – Monopolistic Competition
In this case, numerous companies within a certain sector sell similar products that are not identical. As a result, these companies cannot control the prices of the products for their profits.
#4 – Oligopoly
Oligopoly market system has a few sellers of some unique products and cooperates with each other to control the market power in unison. As a result, the firms can collectively raise the price to profit.