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What is a Market Economy?

Definition: A market economy is an economy that allows the free flow of goods and services based on the interaction of demand and supply.

What Does Market Economy Mean?

What is the definition of market economy? Market economies are open economies that enable the free flow of goods and services between producers and consumers based on demand and supply. The main characteristic of market economies is that economic decisions are regulated by the market itself, which always finds a way to rebalance.

For example, as the prices in one industry may increase due to higher consumer demand, the labor required to produce higher output increases proportionally. In that way, producers deliver the output that meets consumer demand, whereas the competitive forces keep the prices at a moderate level so that consumption increases in the long-term.

Letís look at an example.

Example

The United States is the best example of market economies where the free flow of goods and services facilitates and protects both producers and consumers.

First, there is no governmental control, and the exchange of goods and services is determined by the market mechanisms of demand and supply.

Second, the supply of goods and service can meet consumer demand. At the same time, consumers are willing to pay a higher price for a good or a service from which they can derive satisfaction.

Third, firms have a major interest in producing those goods that satisfy consumer demand. In doing so, they increase their profitability, and consequently they are hiring more workers to meet the increased need for production. Therefore, personal interest is significant in an economy as privately-owned businesses seek profit maximization.

Finally, an economy is characterized by innovation. The more innovative the production factors employed, the more efficient their use, thereby resulting in the production of better products that satisfy consumer demand. As a result, the most efficient businesses invest in new equipment, thereby improving output and potentially creating new demand for innovative products and services.

Summary Definition

Define Market Economies: Market economy means an open marketplace where producers and consumers can transact freely.

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