You have probably already heard of the market or free market economy. Even though most people automatically associate it with the economy, very few really understand its meaning. What really is the market economy? How does it work? What does this system imply?
The objective of this article is to clarify all these doubts associated with the market economy. We will explain what it is, its advantages and disadvantages and an example for a better understanding.
What is the market economy?
When we speak of the market economy, or free market, we refer to the organization and set of the different productive and consumption factors by society. These revolve around the famous laws of supply and demand. It is basically a liberal model defended by those who believe that the State should not intervene, or do it to the least possible extent, in the economic affairs of any country.
On the other hand, there is the directed economy, in which the State conditions the economy in order to fulfill certain social, political and ideological projects. However, there is no consensus as to where the boundaries lie between a command economy and a market economy. It's more, The term 'mixed market economy' has begun to be used to refer to a middle ground.
Similarly, there are debates as to which aspects of the economy should be left to the free market and which should be addressed. Either way, the market economy is present throughout the world that is part of capitalism, yes, in some places to a greater extent and in others to a lesser extent.
Law
Within the market economy system There are two types of competition to highlight:
- The perfect competition: This type of competition exists only in an ideal state, for the moment. In this case, it would be regulated solely and exclusively by the laws of supply and demand. These tend to achieve stability and equalize.
- Imperfect competition: On the other hand, imperfect competition occurs when there is an intervention in the economy by external factors. These could be, for example, subsidies, state protections, monopolies, unfair competition between companies and regulations.
Advantages and disadvantages of the market economy
As expected, the market economy system has advantages and disadvantages, like almost everything. Next we are going to list the benefits that this type of economy can bring us:
- Lower final prices for consumers due to the large number of competitors.
- More variety in terms of supply. Consequently, the consumer has more options to choose from when they want to buy something.
- Generally, entrepreneurs tend to promote initiatives and take risks. Of this handle economic mobility is maintained.
- According to theories of some economists, society would have more political and civil liberties if economic freedom were given.
Although these points sound great, you also have to keep in mind that the market economy can have certain disadvantages What should we consider:
- The less well-off sectors could become marginalized, since those who lack capital will not be able to enter this economic game.
- Because capital would end up rotating among the same social groups, there would be no class mobility. That is to say: The poor would remain poor while the rich would remain rich.
- There is a certain tendency to unfair competition and monopoly. However, these cases are usually related to State intervention.
- The market economy can be harmful to the environment. Unfortunately, this aspect is not usually considered a relevant factor in liberal economic theories.
Market economy example
To better understand the market economy system, we are going to explain it with an example. The operation of this economic system can be represented by the price difference related to the technology when it is newly developed. At the time when a new technological advance appears, its prices are usually so high that only the elites have access to it. Therefore, the existing offer is limited. However, As the demand for this new technology increases, new competitors also appear, offering more shopping options to consumers. Due to this process, the price tends to fall, giving rise to the massification of its consumption.
In conclusion, we can say that the market economy, like all other economic systems that exist, has important advantages and disadvantages to take into account. Although it is a very popular system among most economists, it is still quite a long way from the state of utopia that many people want with all their might.