The first is the private ownership of property, which is effective in motivating people to work as hard as they can to buy and own more goods. This can be defined as capitalism, where the biggest part of one’s wealth is property.
Secondly, it must be noted that the factors of production (land, labor, and capital) are affected by the general income that the individual has, and in connection with this feature of the economy, the price of good is determined by the idea of “supply and demand”.
The third aspect of a market economy is freedom of choice, which involves the consumer or the firm taking risks in investment. This is closely linked to the feature of competition; firms sell more products if they are more competitive, and essentially, this is the main focus of a market economy. Firms and consumers are allowed to (and should) take risks in the economy, which enables the individuals to attain a high profit. This is definitely another advantage of the economy, because in parallel, people are able to achieve a higher standard of living. Lastly, there is a limited role for the government in a market economy, and this definitely offers many advantages to the system. The government is only allowed to regulate firms (to make sure there are no monopolies, which means that there is more chance to have a higher income), to tax and spend (meaning that in the end, the individual gets the luxury of welfare), and to legislate certain issues (such as determining a minimum wage law, which ensures that one will have enough money for the bare essentials). All of these factors then combine with others, such as the price mechanism to create a very successful form of economy, that the majority of the world is pleased with. For a free market economy such as the United States which has an approximate of 25% state to 75% private mix.
Even though the market economy is the best economy it has some serious flows because of bureaucracy and low efficiency of government organized institutions a real life example of this would be the old Belgian airlines Sabena which went bankrupt because they had no Entrepreneurship, costumer focus and because of promotion off political connections.
The mixed markets economies allocate resources according to price which in turn follow the demands of consumers, and so this ensures "efficiency". as the demand striving for a good increase for example by shifting from to d to d1 as shown below in the Diagram, the market immediately responds by putting more resources (either land labor or capital) into the production of that good. In other words the price system in market systems improves the allocation of scarce resources. The allocation in mixed market economies is very effective because not only does it respond to the demand of the consumers but it also ensures that the resources are used as efficiently as possible.
History has proven that a mixed market economy is the most successful market system. The aim of each country is to get as close as possible to its production possibility frontier, because I want a higher standard of living. As seen in the past, Soviet Russia had no unemployment; The U.S.A allocated his resources much better than the Soviet Russia and achieved a much higher standard of living. This was because the U.S.A. had an enterprise spirit, adapted the free market economy and people were risk taking.
Sources Used
- Collins Dictionary of Economics
- Introductory Economics by GF Stanlake and SJ Grant
- Economics A new Approach by A.G Anderson
- Economics from a global perspective by Alan Glanville.
