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Market Economies

The best examples of this type of economy are to be found in small South-East Asian states like Hong Kong and Singapore, though even they are not pure examples of market economies. Even they contain some businesses owned and run by the state.

In a true market economy the government plays no role in the management of the economy. Workers are paid wages by employers according to how skilled they are and how many firms wish to employ them. They spend their wages on the products and services they need. Consumers wish to spend more on products and services which are favoured. Firms producing these goods will make more profits and this will persuade more firms to produce these particular goods rather than less favoured ones.

Thus, we can see that in a market economy it is consumers who decide what is to be produced. Consumers will be willing to pay high prices for products they particularly desire. Firms which are privately owned, see the opportunity of increased profits and produce the new fashionable and favoured products.

Such a system is, at first view, very attractive. The economy adjusts automatically to meet changing demands. No planners have to be employed, which allows more resources to be available for production. Firms tend to be highly competitive in such an environment. New advanced products and low prices are good ways to increase sales and profits. Since all firms are privately owned they try to make the largest profits possible.

Not surprisingly there are also problems. Some goods would be under purchased if the government did not provide free or subsidized supplies. Examples of this type of goods and services are health and education. There are other goods and services such as defence and police, that are impossible to supply individually in response to consumer spending. Once defence or a police force is supplied to a country everyone in this country benefits.

A cornerstone of the market system is that production alters swiftly to meet changing demands. These swift changes can, however, have serious consequences. Imagine a firm which switches from labour – intensive production to one where new technology is employed in the factory. The resulting unemployment could lead to social as well as economic problems.

In a market economy there might be minimal control on working conditions and safety standards concerning products and services. It is necessary to have large-scale government intervention to pass laws to protect consumers and workers. Finally, firms have to have confidence in future sales if they are to produce new goods and services. At certain times they tend to lack confidence and cut back on production and the development of new ideas. This decision, when taken by many firms, can lead to a recession. A recession means less spending, fewer jobs and a decline in the prosperity of the nation.

Answer the questions:

1. What is market economy characterized by?
2. Who decides what is to be produced in market economy?
3. What are problems in market economy?
4. What is a cornerstone of the market system?
5. What does unemployment lead to?
6. What does a recession mean?

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