Experts in economics refer to the essential terms in this field as the market economy, command economy, and mixed economy, each of which has its characteristics. 

In the meantime, the market economy is one of the concepts of mixing with the lives of all people. The market economy, also known as a free market economy, is a particular type of economy that industrialized countries mostly paid attention to in the past. Still, today it is paid attention to by many economic activists.

What is a market economy?

A market economy is an economic mechanism in which goods and services are produced based on the laws of supply and demand. Supply and demand is an essential economic principle that states how the balance between the demands of customers and businesses with the supply of products, goods, and services regulates their prices. In a market economy, companies seek to provide their products, interests, and services at the highest price consumers can afford. In contrast, consumers seek the lowest price they are willing to pay to access the products, interests, and services. The same applies to businesses, as businesses seek to attract skilled workers with the lowest salaries. In contrast, workers strive to provide their services at the highest wages commensurate with their skills.

Is the market economy a critical concept?

The answer is yes. A market economy offers essential advantages. For example, a market economy ensures that products, goods, and services are supplied based on market demand. One of the critical features of a market economy is the incentives and rewards it pays for innovation. People always like to deliver the highest price for goods or services that meet their needs. Competition in the market economy makes businesses and companies always compete to provide people with the best goods and services with the highest quality and at a lower price than the competition. Companies must develop innovative ideas and improve products and services to survive in a competitive market.

How does the market economy work?

Most market economies operate as mixed economies when there is a balance between free market forces and government policies. Such governance policies may include monitoring and controlling the illegal entry of goods and allocating subsidies for public goods and services such as education and transportation. In general, the market economy has well-known characteristics, among which should be mentioned the freedom of choice, the motivation of personal interest, competition, personal mockery, and the system of markets and prices. Next, let us examine each of these components briefly.

Freedom of choice

In the market economy, the owners have the freedom to produce, sell and buy the goods and services they want in a competitive market. Their freedom of choice about production, installation, or purchase depends only on the amount of capital they have and the price they like to set for selling or offering their services. To be more precise, freedom of choice means that businesses and entrepreneurs are encouraged to start new companies, which causes competition in the market because consumers can have more options in choosing and buying.

Motivated by personal interest

The characteristic of self-interest motivation means that people assign tasks based on their interests. In the market economy, the above feature is manifested by consumers who get the desired products, goods, and services at the lowest price. At the same time, entrepreneurs and business owners seek to profit most from their businesses. Personal motivation is one of the factors affecting the market economy.

Brief governance policies

In the market economy, governance policies are general. Market economies are primarily controlled by consumer demand to provide customers with specific products, goods, and services. However, government policies can still play a regulatory role in the performance of market economies. The governance regulatory function is carried out to ensure that a particular brand does not monopolize the market and that other companies can compete with each other.

Competition

Competition is another important factor in a market economy. Competition drives businesses to produce higher quality and more efficient products. Competition ensures that the products, goods, and services consumers want to use are offered at a price they are willing to pay. Competition prevents companies from establishing a commercial monopoly in the market.

Personal ownership

Personal and private ownership means that the asset request is related to the people who buy the support and the businesses that produce the investment. Because ownership is private, owners can enter into legal contracts that provide for the purchase or sale of assets. In such a situation, asset owners can earn profit from their investments.

Markets and prices system

A market economy requires a dynamic and efficient market to sell goods and services. In this market, buyers and sellers have equal access to information. In this way, businesses can compete with each other to get more customers and allow customers to make informed purchasing decisions. In this case, the prices will be accurate and based on supply and demand.

In the market economy, the law of supply says that prices will be low whenever the supply of goods or services exceeds the market demand. On the other hand, the law of demand states that prices will be higher whenever the demand for goods or services exceeds its supply. In connection with the order, one should pay attention to 5 critical factors cost of goods or services, the income of buyers, price of related goods and services, tastes and interests, and expectations of consumers.

Finally, pay attention to the critical point that market economy and cooperative economy have two different definitions. A collaborative economy is based on a mechanism where people share their wealth through peer-to-peer activities. This economy is also known by other names such as gig economy, access economy, or peer-to-peer economy.