A market economy operates within a legal framework set up by the government, with competition allowing for more choices, improved product quality, and economic growth. Self-interest is key, and entrepreneurship is a fourth economic resource. Growth depends on the use of capital, and the sustainability of market economies depends on private property laws.
A market economy is one in which individuals and businesses operate within a legal framework set up by a government. The key factor here is that governments don’t interact – or do so much – with the market. The role of competition in a market economy is often what makes this system work well. In most cases, competition allows for more choices, improves product quality through the efficient use of resources, and enhances economic growth through increased investment. In most cases, the results of the competition are almost always positive.
Self-interest is one of the key aspects of a market economy. It allows individuals or businesses to make their own decisions about how to spend income and invest extra capital. Economists often refer to this as process choice, with more choices making an economy a better fit for the needs and wants of many individuals and businesses. Competition may allow you to choose between branded products and substitute items. For example, an individual may choose between more expensive and popular shoes or slightly less popular but sufficient sneakers that cost less.
Economic resources are classically defined as land, labor and capital. The use of these resources leads to goods and services being bought and sold. A fourth economic resource is entrepreneurship, which is the ability of an individual to transform the production of economic resources into a successful business. The role of competition in a market economy allows more people or businesses to use resources efficiently and produce the cheapest products with the best quality. Constant competition further refines a company’s use of resources and forces it to improve products and operations or suffer the consequences.
Growth in a market economy depends on the use of capital. Competition allows new businesses to start and increase total output. When this occurs, the result is natural economic growth. Individuals have better jobs and potentially higher incomes, demand for goods and services increases, and businesses start or increase supply to meet the demand. The cyclical nature of a market economy allows for more investment and, in turn, more growth and production.
The long-term sustainability of market economies depends on the amount of freedom in a market economy. Private property laws are among the most important in these systems. When individuals can keep the resources or capital they earn, the market tends to be successful for sustainable periods of time.
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