Market Economy Definition Market Economy Explained Types of Market Economy

ADVANTAGES AND DISADVANTAGES MARKET ECONOMY

Plan

1. 
   Market Economy Definition
   
2. 
   Market Economy Explained
   
3. 
   Types of Market Economy
   

Market Economy Definition
A market economy (ME) refers to a form of economic system where businesses and consumers drive the economy with minimal government intervention. In other words, the laws of demand and supply determine the price and quantity of goods produced in an economy. It encourages entrepreneurship and results in greater production efficiency and consumer satisfaction.


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Market economies are free economies or free markets where the extent of state intervention varies from minimum to moderate. Capitalist economies like the US come close to it. It is based on the idea that the profit motive of private businesses in trading would promote competition and innovation among companies and offer greater freedom of choice to consumers. As a result, economic efficiency improves, benefiting the entire economy.

Table of contents
Key Takeaways

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  A market economy is a system where private individuals and businesses operate the economy on the basis of demand and supply without much state intervention.
  
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  It increases economic efficiency and provides more independence to both businesses and customers, in turn promoting economic growth.
  
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  Though the market economy positively impacts a nation’s economy, the profit motive hampers social welfare.
  
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  There are six major types of markets—perfect competition, monopoly, monopolistic competition, oligopoly, oligopsony, and monopsony.
  

Market Economy Explained
The Market Economy is a market system where businesses independently produce goods and services based on their demand in the market. In this type of economy, all means of production are under the control and ownership of private entities or individuals. They are free to invest, produce, or trade as per their will without any government interference. Let’s see how it works.
When consumers purchase goods and services, it tells the economy their preferences. So, businesses try to produce more of such goods at the least possible cost to meet the demand. Since the profit motive primarily drives them, they try to charge the highest possible price. However, competition among sellers keeps the prices low.
As a result, the interaction of demand and supply establishes an equilibrium price for goods or services. As evident, consumers and businesses decide the price and the quantum of goods and services produced in such an economy.
Thus, the market forces of supply and demand, rather than the government, drive most of the activities in a Market Economy. The range of government interference in a market economy differs. A 100% market economy will have no intervention from the government. However, that is possible only in theory. In real life, the government’s role in such an economy is limited to:

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  Providing equal opportunities for trading in the market to all
  
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  Ensuring applicability of market rules equally
  
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  Charging taxes on the market, businesses, and individuals for the welfare of people
  
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  Regulating the market as per government policies
  

Furthermore, the Market Economy is based on the premise that the more the trade is conducted freely and fairly by individuals and businesses with a profit motive, the more it is beneficial to the nation’s economy.