What is a market economy?
A market economy describes a network of separate markets, where goods, services and resources are privately owned and sold based on decisions of owners. Countries such as Australia, US, Japan, the UK and Germany all operate in a capitalist society with 'free market economies.'
Planned and Mixed Economies
The opposite of market economies are planned economies, where goods, services and resources are collectively owned and sold under the decisions of particular authorities. These two structures have varying strengths and weakness, therefore, the most efficient solution that is both efficient for the trade of privately owned goods and services as well as offering government provided social goods, is a system known as a 'mixed economy.' This combines the structures of both planned and market economies to allow a variety of goods, services and resources to be both sold and provided for citizens.
Want your ATAR notes to empower over 77,000 students per year?
Join the Team.
Characteristics of a Market Economy
Sign Up for Free to Read More
Get instant access to all content and subscribe to our weekly email list on study tips, opportunities and other free resources.
It only takes a minute...
There are six key characteristics of a Market economy: 1. Property rights and private ownership This means that, through contract law and the justice system, private firms have ownership or property rights over resources and goods. In turn, this means that owners are free to sell their property rights to the highest bidder. 2. Economic freedom This means that markets have a voluntary exchange. Both buyers and sellers are free to participate in the economy if they choose to do so. In this way, producers can sell what they wish to and consumers can purchase commodities as they need or want them. 3. Self-interest This feature relates to economic freedom, as markets usually offer a motivational force for both buyers and sellers to enter into the market. This self-interest for businesses is to have the opportunity to make a profit and for a consumers to improve their standard of living. 4. Competition Market economies need healthy competition in order to work efficiently. This means that monopoly power must be restricted by the ACCC (Australian Competition and Consumer Commission) to avoid distortion of market prices, incomes and allocation of resources. Monopoly powers occur when a business have no competitors and therefore controls the price levels for that particular market. 5. Moral hazard This means that to a certain degree, consumers must abide by their financial decisions and accept the consequences of misjudged purchases and spending's. For instance, in contracts partys enter at their own risk. 6. Limited role of the government In market economies, the restricted role of the government within mixed market economies allows private ownership and fair competition between firms. The role of the government is to protect property rights, enforce contract law, protect people with no resources to sell and monitor and restrict monopoly power.