Market Economy

Market Economy

What is a Market Economy?

Definition: In a market economy, the law of supply and demand is allowed to operate. Government interference in economic activities is minimal. This system ensures that productive resources are used in the most optimal manner.

What does market economy mean?

A market economy is a type of economic system in which there is a high degree of competition. Producers do their best to manufacture goods at the lowest possible price. If their production methods are inefficient or if they have a high cost structure, they will be driven out of the market by other manufacturers.

Consumers have freedom of choice in a market economy. They can purchase goods and services from sellers who offer the lowest prices and the greatest benefits. This ensures that those who are providing the goods and services do their best to minimize costs and maximize the quality of their output.

The profit motive plays a vital role in a market economy. Firms try and sell at the highest possible price so that they can boost profits. Investors deploy their capital in a manner that earns them the highest return. Individuals work for firms that offer the highest wages and the most benefits.

A free market system is the opposite of a “command” economy. In a command economy, the government plays a very active role in economic decisions and owns a significant share of a country’s productive assets.

Example of a market economy

A country that follows a market economy system is usually more prosperous than a nation where the government exercises a great degree of control over economic activities. The Heritage Foundation, a think tank based in Washington, D.C., publishes the Index of Economic Freedom. This is a ranking of the countries where the economic system is allowed to operate on the basis of market forces.

The Index measures 12 freedoms ranging from property rights to financial freedom, in 186 countries. The top 10 countries in its 2018 listing are:
  1. Hong Kong
  2. Singapore
  3. New Zealand
  4. Switzerland
  5. Australia
  6. Ireland
  7. Estonia
  8. United Kingdom
  9. Canada
  10. United Arab Emirates

Summary

A market economy is characterized by competition and the principle of profit maximization. Government interference in business and the deployment of the factors of production is at a minimum.