A market economy is driven by the laws of supply and demand, with financial decisions made by citizens and businesses. Prices and output are determined by the market, making it flexible and reactive. However, government intervention is common, and most economies are a mix of market and planned characteristics.
A market economy is one in which the majority of financial decisions are made by both the citizens of a country and the businesses that target those citizens. One of the main features of a market economy is the fact that the quantity of goods produced and the prices of these goods are determined by the laws of supply and demand. In general, market economies are usually left to develop without much intervention by any type of government body. Other characteristics of a market economy include its flexibility and the fact that there is no centralized force behind economic momentum.
There are two extremes in terms of the economic identity of specific countries. A planned economy is one in which the government makes most of the decisions related to the economy. Conversely, a market economy is one in which the market itself, driven by the actions of consumers and producers, is the ultimate determinant of such aspects of the economy as prices and output. Consequently, the characteristics of a market economy are such that it is flexible and reacts to stimuli within the market rather than any government interference.
The law of supply and demand is one of the defining characteristics of a market economy. This means that the quantity of a particular good will have an effect on how much consumers want that product. In general, these two forces work in inverse proportion to each other, meaning that demand increases when supply decreases and demand decreases when supply increases.
Knowing this, enterprises charged with the production of the various goods and services for sale in a market economy will respond to consumers’ interest in these goods and services. As the demand for a specific product increases, companies will raise the price of the product in response to this. After a while, the price will become too high for consumers to pay, and they will cease to purchase the product at that level. This will reduce the demand and increase the supply and the price will go down. Equilibrium is finally achieved in this way.
While these characteristics of a market economy tend to dominate the economies of countries around the world, they are often tempered by some level of government intervention. For this reason, a pure market economy rarely exists in the world. Most economies mix between the characteristics of a market economy and those of a planned economy.
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