An economic system in which all economic activities like production, distribution, extent, etc are organized and carried out by private sectors and guided by profit motive through market forces demand and supply is called a market economy. It is also called "Leissez Faire Economy" or "Capitalist Economy" or "Free Enterprises Economy". The private sector is the backbone of economic development and government in the monitor and supervision of the economy. Its role is limited to its regular functions such as maintaining peace and security, law and order and so on.
The main features of market economy are as follow:
1.) Right of Private Property
In a market economy, individuals have right to control or dispose off the resources such as land, building, machinery and other natural resources. It also provides the owners of property with the right to receive income from their property in the form of rent, interest, and profit.
2.) Self Interest
Individuals are motivated by their self-interest in a market economy. They engage in economic activities what seem best for them. Likewise, a firm will operate to get minimum profits. Consumers will spend on those things from which they get minimum satisfaction.
3.) Consumer’s Sovereignty
Consumers are free to allocate their income into consumption and saving. They are free to purchase their needs and want according to their taste, preference, and ability to pay for it as the producers are even free to produce and sell any kind of goods and services.
4.) Price System
The price of economics goods and services is determined according to the cost of production, their utility and demand and supply of product. The demand and supply cause the changes in market price. People respond to incentive.
5.) Economic Activities
In an economy, market distribution of income and wealth is still not fair. Some of the people are very rich whereas some are facing the problems to fulfill their basic needs. Some people hold goods so that other does not get means for basic fulfillment. Thus, rich becomes richer and poor becomes poorer.
6.) Role of Government
Under a market economy, simply a government stands as a facilitator or regulator of an economy. Government invests the resources in public goods and services likewise drinking water, education, and health which provides social welfare in the economy.
7.) Freedom of Choice
The individuals are free to buy economic resources and choose them for production and sell as their choice. Likewise, the owner of land can use his land as their choice and employers are free to work and resign any occupation as their qualification.
8.) Perfect Competition
Perfect competition helps consumers to satisfy during consuming goods and services at a reasonable price with quality in an economic market while facing the competition of price and quantity of such goods and services.
The following are some advantages of market economy:
1.) Variety of Goods and Services
The consumer can get a variety of goods and services as there are varieties of goods and services produced in the economic market. They are free to choose the goods as their choice.
2.) Economic Efficient
Competition increases the efficiency of the market. Perfect competition is the main base of the market economy. Producers face the price, quality, and quantity in this market.
3.) Economic Freedom
People are free to use their resources as they want for their own benefits. Such as consumer can use their land for their own purpose or give on rent for profit.
4.) Economic Adjustment
The producer can change their product instead of what they produce as the demand changes according to the market. They are free to use their property as they like for their benefit.
5.) Invention of New Technology
Due to the competition between the economic agents in the market, there is a high chance of invention of new technology.
The following are some disadvantages of market economy:
1.) Create Economic Inequality
One of the major disadvantages of the market economy is that it creates a gap between rich and poor in the society.
2.) Private Sector Domination
In the market economy, a majority of the economic activities and allocation of resources are carried by private sectors.
3.) Profit motive
The market economy is dominated by private sectors. They carry their economic activities being profit motivate other than services motive as their main goal is profit maximization.
4.) Capital Outflow
There is free movement of factors of production in the market economy even in the international market. If the business sees profit in other countries there may be an outflow of the capital.
5.) Possibility of Illegal Trade
Most of the people are engage in the trade with the profit motive. They are engaged in the illegal trade to earn a lot of profit and accumulate more properties bin short time period.
The quantity of goods and services that the consumers are willing and able to purchase from a market at a different price and time period is called demand. Generally, wants and desire of a consumer can be called demand. Thus, the demand is effective desire only when the above condition satisfies:
Demand is described in a various way according to the different economist.
According to the Pappas and Brigham, "The term demand is defined as the number of units of particular goods or service that consumers are willing to purchase during a specific period and under a given set of condition."
According to Milton H. Spencer, "Demand is the quantity that will be purchased of a particular commodity at various prices, at a given time and place."
There are certain factors that are responsible for the variation in the demand. The responsible factors that cause effects in demand are known as determinants of demand. Some of the major determinants of demand are described as follows:
The price of a product is the main determinant of the demand for the product. Other thing remaining same, quantity demanded is higher at a lower price and it's lower at a higher price.
The income level of the consumer is another determinant of the demand. At a higher level of income, demand will be high for luxurious goods and low for inferior goods and vice versa.
Taste and preference of a commodity depend on upon a consumer. If goods are highly fashionable in the market then the demand for it will definitely high and the goods out of fashion will be wiped out. Thus, the taste and preference of consumer also determine demand.
Demand for products will be high in a large and favorable composition of population than in a low and unfavorable of a population. Thus, the size of the population also determines demand.
As the consumer knows about the new product through advertisement the demand for such products will be high. Hence, the advertisement also helps to determine the demand.
If people expects the price of a product going to be high in near future then demand for such products will be higher in the present. On another hand, an inverse conclusion can be derived if the expectation price of future declines.
Simply at winter, warm clothes are demanded highly and in summer cotton cloths are demanded highly. People consumes more quantity such goods to any change in price. Thus, the climate determines demand.
New technology can invent new products and replace old products. Thus, the demand for the old products reduces without the change in price and demand for new products increases even if the price is higher. Hence, the new technology determines demand.
(Karna, Khanal, and Chaulagain)(Khanal, Khatiwada, and Thapa)(Jha, Bhusal, and Bista)
Jha, P.K., et al. Economics II. Kalimati, Kathmandu: Dreamland Publication, 2011.
Karna, Dr.Surendra Labh, Bhawani Prasad Khanal and Neelam Prasad Chaulagain. Economics. Kathmandu: Jupiter Publisher and Distributors Pvt. Ltd, 2070.
Khanal, Dr. Rajesh Keshar, et al. Economics II. Kathmandu: Januka Publication Pvt. Ltd., 2013.