A market economy is an economic system that allows the economy to self-organize based on fundamental economic forces such as supply, demand and competition. The following are common examples.
PricesPrices in a market economy are set by the forces of supply and demand. For example, if your product has more demand than you have supply, you will charge a high price. This is contrasted with a planned economy whereby prices may be set by the government. The latter situation typically results in inefficiencies such as surpluses and shortages.
CreditA financial system whereby financing such as loans is based on supply, demand and competition between banks. Generally speaking, banks loan out money according to estimates of risk-reward. This tends to be more efficient that having the government decide who gets funded and who doesn't.
InvestmentInvestment and risk taking are in the hands of individuals who seek rewards. For example, a system whereby ambitious individuals start companies as opposed to government officials.
ProductionProduction decisions are made by producers who optimize profits by meeting customer demand. This tends to result in little waste such as surpluses or shortages as compared to central planning that dictates what customers should need.
As with production, distribution decisions in a market economy are in the hands of the producer such as an airline that chooses its routes based on demand and competition.
GovernmentGovernment in a market economy focuses on things that are inherently public services. Where exactly this line is drawn tends to be a point of contention. For example, some argue that healthcare is inherently a public service because private firms would have perverse incentives if they ran the system because profits would go up if people stay sick.
A market economy requires rules, regulations and enforcement to keep fair competition alive. For example, a large firm that dominates an industry may use aggressive strategies to prevent competition, raise prices and influence government to stack things to its advantage. Another area of government involvement in a market economy is consumer protection. For example, protections that prevent firms from misrepresenting products, imposing unfair terms or selling things that are unsafe.
A market economy may use up or destroy common goods such as air, water, soil and ecosystems without regulations or incentives to protect these resources. For example, a factory producing widgets worth $1 may produce $4 of environmental damage per widget. This is an irrational situation that can also occur in a planned economy.
This is the complete list of articles we have written about competition.
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An overview of supply and demand with examples.
An overview of the law of supply and demand with examples.
The definition of supply with examples.
A definition of supply shock with a few examples.
An overview of supply with common examples.
An complete overview of demand including the law of demand, equilibrium and elasticity.
Common examples of demand in economics.
The definition of marginal utility with examples.
The definition of marginal change with examples.
A list of ways to compete in a crowded market.
A few sources of competitive advantage for businesses.
A definition of competitive benchmarking with examples.
A few examples of a competitive disadvantage.
The difference between competitive parity and competitive advantage.
The common types of competitive threat.
A complete overview of competitive markets with examples.
The definition of win-lose with examples.
The definition of monopoly with examples.
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