Basic Concept of Market Economy

Meaning of Market Economy

A market economy is an economic system which resolves basic economic problems mainly through the market mechanism. Market economy is also known as the capitalist or free enterprise economy. Mainly, there are three basic economic problems. What, how and for whom to produce. These economic problems are resolved by market mechanism. Market mechanism means the allocation of resources through the interaction between demand and supply.

According to Professor Loucks,"Capitalism is a system of economic organization featured by the private ownership and the use for private profit of men-made and nature-made capital." It is clear from this definition that under the capitalism or free market economic system all means of production such as firms, factories, mines, transport are owned and controlled by private individuals and firms. Those who own the means of production are free to use them in any way they like with a view of making profits. Everybody is free to choose any business or job he likes.

There is free market economic system in the advanced countries like USA, UK, Japan. The industrialization and economic development of these countries has taken place under the condition of free market of capitalism.

Features of Market Economy

The main features of market economy are as follows:

• Private Property:

The right of private property is a major feature of market economy. The right of private property means economic or productive factors such as land, factories, mines, etc. are under private ownership and the ownership and the owners have right to own, control and dispose these means of production.

• Freedom of Enterprise and Choice:

There is freedom of enterprise and choice in market economy. Freedom of enterprise means that individuals are free to buy and hire economic resources, to organize these resources for production and to sell their product in market of their own choice.

Freedom of choice means that workers are free to enter into any occupation for which they are qualified and consumers are also free to buy any type of goods and services which they feel appropriate for their wants.

• Competition:

In the free market economy, competition exists between sellers or producers of similar consumer goods and services to attract customers, among the workers to get jobs and among the buyers to obtain goods to satisfy their wants. Competition promotes best use and efficient allocation of resources in the free market economy.

• Consumers' Sovereignty:

Under the market economy, consumers are supposed to supreme and is compared to be a king. The goods and services are produced according to the demand of the consumers.

• Self-interest:

The free market economy is based on the principle of self-interest. It means that individuals should be free to do as they wish. Each unit in the economy attempts to what is the best for itself. Firms act in such a way which leads to maximum profits or minimum losses. Workers move to those occupations which offer them highest wages. Consumers spend their income on those things which gives them maximum satisfaction.

• Market and Price

The free market economy functions through price mechanism. It means that economic problems are solved through the operation of prices in the market. Both buyers and sellers make decision on the basis of price of the product in the market.

• Limited Role of Government

Since the free market economy functions through and most of its problems are solved by markets and price, there is obliviously little role government can play, the role of government is to maintain law and order and create infrastructures which help to increase production and overall economics development.

• Profit Motive

In the free market economy, economic activities are under taken with the aim of earning profit. All the decisions regarding what to produce, how much to produce and for whom to produce are taken on the basis of profit and not on the basis of social welfare.