Academia de Studii Economice

Facultatea de Comert

The Characteristics of
Market Economy


Lector doctor: Autori:
Virginia Mihaela Dumitrescu Precup Corina
Proca Raluca
Radu Stefan
Rotaru Simona
Saviuc Alin
Bucuresti
- 20-

The Market Ecomony
The market economy, also called free market economy or free enterprise economy is, proaly,
the est sustitute for economical freedom! Among history "e had many e#amples of different types of
systems, like socialist, capitalist or planned economy ut the one "ho seemed to function most "as the
market economy! People emrace it ecause it gives them the freedom, as a producer, of choosing "hat
goods to produce, ho", "hen and to "hom to sell them, and as a consumer, it offers the opportunity
also to choose et"een competing goods and services and freedom as a "orker to choose among
different $os or careers! %asically, it goes y the principle of competition, "here every seller has to lay
out his merchandise at a price estalished y the market itself!
&n the real "orld, market economies do not e#ist in pure form, as societies and governments
regulate them to varying degrees rather than allo" full self'regulation y market forces! The term free
market economy is sometimes used synonymously "ith market economy,

ut, as (ud"ig )rhard once
pointed out, this does not preclude an economy from having social attriutes opposed to a laisse*'faire
system!

The !rinci!les of market economy
+! Free markets ' the production and distriution of goods and services takes place through the
mechanism of free markets!&n a market economy, the price of each product is estalished
according to a mutual consent et"een the uyer and the seller, in opposite to the planned
economy "here the price, ,uantity and distriution of products are set y the government,
"hich practically controls the market!
-! Free !rice system ' the prices are set y the interchange of supply and demand, meaning the
matching of the sellers asking prices "ith the uyers id prices, as a result of su$ective value
$udgment! &s an economic system "here prices are set y the interchange of supply and
demand, "ith the resulting prices eing understood as signals that are communicated et"een
producers and consumers "hich serve to guide the production and distriution of resources!
Through the free price system, supplies are rationed, income is distriuted, and resources are
allocated! A free price system contrasts "ith a controlled or fi#es price system "here prices are
set y government, "ithin a controlled market or planned economy!
.! The inter!lay of su!!ly and demand ' The theory of supply and demand is important in the
functioning of a market economy in that it e#plains the mechanism y "hich many resource
allocation decisions are made!
%asically, in a market economy the relation et"een the supply and the demand estalishes its
direction, the prices and the eventual risks oth parties may take "hen engaging in an
interchange process! Supply and demand is an economic model of price determination in a
market! &t concludes that in a competitive market, the unite price for a particular good "ill vary
until it settles at a point "here the ,uantity demanded y consumers /at current price0 "ill
e,ual the ,uantity supplied y producers /at current price0, resulting in an economic
e,uilirium of price and ,uantity!
1! "roducers self-interest ' %y follo"ing their o"n self'interest in open and competitive
markets, consumers, producers, and "orkers are led to use their economic resources in "ays
that have the greatest value to the national economy '' at least in terms of satisfying more of
people2s "ants! The first person to point out this fact in a systematic "ay "as the Scottish
philosopher Adam Smith, "ho pulished his most famous ook, An Inquiry Into the Nature
and Causes of the Wealth of Nations, in +334! Smith "as the first great classical economist,
and among the first to descrie ho" an economy ased on a system of markets could promote
economic efficiency and individual freedom, regardless of "hether people "ere particularly
industrious or la*y!
&t has een proved among the years that the production ,uality and ,uantity reaches its est
"hen people produce not only for the common good ut, especially, for their o"n good! Self'
interest serves as an important factor "hich motivates the producers to use their resources more
efficient, in the purpose of e#panding their enterprise or simply raising more money!
5! #o $o%ernment inter%ention ' the role of government is not to take the place of the
marketplace, ut to improve the functioning of the market economy! 6urther, any decision to
regulate or intervene in the play of market forces must carefully alance the costs of such
regulation against the enefits that such intervention "ill ring!
&n a market economy, the government interferes only to prevent market failure, maintain
stale currency and thus comating the inflation, and protect market competition and the
consumers! 7evertheless, its intervention must e limited, in order not to influence the t"o
parties the uyer and the seller, nor the market price or products distriution!
8ne important point to ear in mind is that the effects of different forms of government
intervention in markets are never neutral 9 financial support given y the government to one set of
producers rather than another "ill al"ays create :"inners and losers;! Ta#ing one product more than
another "ill similarly have different effects on different groups of consumers!
4! Com!etition ' &n a free market economy, competition "orks to ensure the efficient and
effective operation of usiness! Competition also ensures that a firm "ill survive only if it
serves its customers "ell!
Com!etition in economics is a term that encompasses the notion of individuals and firms striving
for a greater share of a market to sell or uy goods and services! Merriam'<ester defines competition
in usiness as =the effort of t"o or more parties acting independently to secure the usiness of a third
party y offering the most favorale terms!= &t "as descried y Adam Smith in The <ealth of 7ations
/+3340 and later economists as allocating productive resurces to their most highly'valued uses, and
encouraging efficiency! (ater microeconomics theory distinguished et"een perfect competition and
imperfect competition, concluding that no system of resource allocation is more Pareto efficient than
perfect competition! Competition, according to the theory, causes commercial firms to develop ne"
products, services and technologies, "hich "ould give consumers greater selection and etter products!
The greater selection typically causes lo"er prices for the products, compared to "hat the price "ould
e if there "as no competition /monopoly0 or little competition /oligopoly0!
A mono!oly is a market structure in "hich there is only one producer>seller for a product! &n other
"ords, the single usiness is the industry! )ntry into such a market is restricted due to high costs or
other impediments, "hich may e economic, social or political! 6or instance, a government can create a
monopoly over an industry that it "ants to control, such as electricity! Another reason for the arriers
against entry into a monopolistic industry is that oftentimes, one entity has the e#clusive rights to a
natural resource! 6or e#ample, in Saudi Araia the government has sole control over the oil industry! A
monopoly may also form "hen a company has a copyright or patent that prevents others from entering
the market!
&n an oli$o!oly, there are only a fe" firms that make up an industry! This select group of firms has
control over the price and, like a monopoly, an oligopoly has high arriers to entry! The products that
the oligopolistic firms produce are often nearly identical and, therefore, the companies, "hich are
competing for market share, are interdependent as a result of market forces! Assume, for e#ample, that
an economy needs only +?? "idgets! Company @ produces 5? "idgets and its competitor, Company A,
produces the other 5?! The prices of the t"o rands "ill e interdependent and, therefore, similar! So, if
Company @ starts selling the "idgets at a lo"er price, it "ill get a greater market share, therey forcing
Company A to lo"er its prices as "ell!
There are t"o e#treme forms of market structureB monopoly and, its opposite, !erfect
com!etition! "erfect com!etition is characteri*ed y many uyers and sellers, many products that are
similar in nature and, as a result, many sustitutes! Perfect competition means there are fe", if any,
arriers to entry for ne" companies, and prices are determined y supply and demand! Thus, producers
in a perfectly competitive market are su$ect to the prices determined y the market and do not have
any leverage! 6or e#ample, in a perfectly competitive market, shoulda single firm decide to increase its
selling price of a good, the consumers can $ust turn to the nearest competitor for a etter price, causing
any firm that increases its prices to lose market share and profits!

Bi&lio$ra!hy:
The Characteristics of the Market Economy ' (ud"ig von Mises,
Human Action: A Treatise on Economics, vol. 2 (LF e.! C+DD4E
<""!"ikipedia!org