Wednesday, October 31, 2018
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Concept of Market economy
Market economy is also called the capitalist economy or the free enterprise economy.In market economy, all economic activities like:production,consumption,distribution,exchange etc are organized and carried out by private sectors and guidance by profit motive by market forces-demand and supply.Market forces demand and supply,determine what to produce,how to produce and whom to produce.Demand for and supply of resources,determine their respective share in total income.Similarly,demand for and supply of goods and services determine the equilibrium price and quantity in the market.There is no extra tax or subsidy on goods and services.Similarly,there are no quotas and rationing.Consumers are free to decide their consumption level and pattern.
In a market economy,individuals are free to allocate their income into consumption or/and saving.There is no control over consumption or consumer from the side of government.Individuals conduct international trade themselves.There is no any control over export and import.Goods and services are free to move everywhere.
private sector is the backbone of the economic development.However,it doesn't mean that there is no role of government.Government is the monitor and supervisor of the economy.It's role are limited to its regular functions such as maintaining peace and security,law and order and so on.The economies of United states,UK,Japan,Germany,and many western developed countries are the examples of the market economy. Moreover, a market economy has got the following features:
1.Economic activities are organized and carried on by the private sector
In a market economy all economic activities are organized by private sector.Firms decided what to produce,how to produce and whom to produce.However,they are guided by the market forces-Demand and supply.
2.Existence of market mechanism
In a market economy,equilibrium prices of goods and services are determined by the two market force demand and supply.People respond to the incentives.Other things being equal,seller seeks high prices while buyers seeks low prices.
3.No government regulation
In a market economy,there is no government intervention in the market.Economic activities are managed and controlled by the market forces.Government functions as a facilitator.The role of the government is to manage the public utilities,law and order,peace and security.
4.Right of private property
In a market economy,individuals have right to organize economic activities,earn income and accumulate wealth in various forms including cash,land,share,etc.
