Features of the Market Economy The following features are

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A market economy is also referred to as private enterprise, free enterprise economy, capitalist system, or capitalist economy Although they may take quite different forms, most economic systems in the world today incorporate the main features of private enterprise or are based on its principles. Features of the Market Economy The following features are characteristic of a private enterprise system: 1. SUPPLY & DEMAND The interplay of Supply and demand through the market is one of the prominent features of a private enterprise economy.

In a market, buyers and sellers meet to exchange goods and services. Supply arid demand determines the prices of all goods and services. When the demand for goods and services is greater than the available quantity, the prices of the goods and services increase.

When the demand for goods and services is less than the supply of goods and services, prices fall. The market benefits both consumers and producers. Consumers benefit because they can move from seller to seller trying to get the best product or service at the lowest price.

Producers benefit in that the market provides them with the opportunity to supply goods and services to Consumers. Producers discover I in the market which products and services ... more. less.

are I in demand among consumers. They specialize in producing only those goods and services demanded. The concept of consumer sovereignty underlies all markets. This means that consumers ultimately decide what goods and services will be produced simply because producers will provide only goods and services consumers are willing to buy. This is also called dollar voting. Consumers express a preference for how the economic resources of society will be used by choosing the goods and services they want to consume. 2. COMPETITION Competition is a critical feature of a private enterprise economy. Competition assures that economic resources are used effectively and efficiently. People are encouraged to specialize in activities where they receive the greatest rewards for their efforts. Competition provides important benefits for consumers and producers. Consumers benefit from competition in the following ways. When the number of firms selling goods is large, prices of goods and services are generally lower. The selecting of goods available to consumers is typically larger. Other benefits are higher quality goods, faster delivery, and better Customer service. When there are few competitors, prices of goods are generally higher, because producers are not compelled to keep prices low and provide better quality goods, faster delivery, and better Customer service in order to keep or increase their market share. Producers also benefit from competition. When the number of firms supplying materials for use in production is large, the costs of them are generally lower, the supply better, and the selection wider. When there is a single supplier, the cost of goods sold to producers is often higher. These higher costs of production faced by producers will be passed on to consumers in the form of higher prices for finished goods. Because competition is a crucial feature of a private enterprise economy, it is believed that it is necessary at times for the government to intervene in the economy to prevent monopolies from being formed and control other efforts by producers to lessen competition. It is felt that government intervention in the economy should be limited to implementing legislation to promote free and unrestricted competition. This role of government is based on the belief that competition provides consumers and producers with the greatest degree of economic freedom and choice. 3. THE PROFIT MOTIVE Incentives in a private enterprise economy are based on individual self-interest and the profit motive. Individual self-interest means that people will undertake those activities that make them better off personally. Consumers have an incentive to seek out the highest quality products at the lowest possible prices. Producers have an incentive to produce and sell those products. Those firms that produce the goods and services that the consumers will buy are rewarded in the form of profits. Firms that fail to respond to their customers 9 needs will not make a profit and may even go out of business. 4. Property Ownership Private property is an essential feature of a private enterprise economy. Private ownership is a fundamental requirement for people to exchange goods and services among themselves. People cannot sell goods and services if they do not have the right of ownership allowing them to transfer ownership to others. Private ownership is important to competition because it encourages people to use their property effectively and efficiently. Private ownership is essential to individual self-interest and the profit motive because ownership allows people to use their property to earn income by either selling it or renting the use of it to other people. All of this explains why most natural resources, factories, equipment, and other means of production in a private economy are owned by individuals or groups of individuals. This is one reason why many economists call an economy based on private ownership a private enterprise economy. How the economic questions are answered in a Market Economy 1. What goods and services should be produced? In a private enterprise economy, people decide which goods and services should be produced and offer them for sale. Consumers demand goods and services to satisfy their needs and wants. Consumers are forced to make choices about which goods and services they can buy. These choices or trade-otis are based on the concept of cost. Producers supply goods and services that Consumers want with a view to earning a profit. 2. How should goods and services be produced? In a private enterprise economy all resources in society-land, labor, and capital-are limited. Individuals are motivated to engage in profitable activities out of Self-interest. Producers must decide how to use scarce and expensive land, labour, and capital in the most cost-effective manner to produce goods and services for consumers. The most efficient and least expensive methods of making goods and providing services are chosen, permitting producers to earn the highest possible profits from the sale of goods and services to consumers 3. How should goods and services be distributed? In a private enterprise s economy the distribution of goods and services is determined largely by people 9s incomes and their ability to buy the goods and services produced. Producers sell goods and services to anyone who can buy them. A person with a high income can buy more goods and services than a person with a low income. A person 9s income is determined by the market for the skills, labour, and capital that he or she is able to supply. The Price System For the market economy to operate, there must be competition between producers for the consumer 9s business. When competition is present, consumers can compare products and prices from competing producers and reward the best producer by buying their product. Producers whose product does not sell must improve or else go out of business. Market prices for goods and services are determined by the supply available and the demand by consumers to buy it. Remember demand means both our desire and ability to buy something. You may have the desire to buy a sporty car but not necessarily have the ability (money) to do so. Supply Demand Price increased Unchanged decreases Unchanged increased increases decreased Unchanged increases Unchanged decreased decreases Private Enterprise Criticized A private enterprise economy has some important disadvantages. An uneven distribution of incomes, economic booms and busts, unemployment, and inflation can all be factors. In a private enterprise economy, individuals decide most economic questions and are expected to make the best use of their own opportunities. Because people 9s skills and training differ, differences in incomes and employment opportunities appear. These differences in incomes are often intensified by the fact that this type of economy experiences periods of booms (economic expansion) and busts (economic contraction). During periods of economic expansion, production and demand for goods and services are high. Opportunities for earning high incomes become widespread. Employment rises and people are able to find work. However, when demand for goods and services drops, accompanied by a drop in production, opportunities for continued high incomes become fewer. Many people become unemployed and have difficulty finding work. Since consumer decisions drive the private enterprise economy, some question the economy 9s ability to use resources in the most socially responsible and efficient manner. Much of the production in private enterprise economies is directed to meeting what might be regarded as frivolous needs, and it may impose costs, such as pollution and resource depletion, on society as a whole. Called externalities, these costs are not borne directly by those involved in producing or consuming goods and services.. The costs are borne by all of society. Advantages and Disadvantages of a Private Enterprise (Market) Economy Advantages " Competition promotes high quality goods and low prices. " A wide selection of goods and services is available to consumers. " Pursuit of profits leads to an efficient and productive use of resources. " Technological change and innovation take place rapidly. " Consumers influence the production of goods and services through consumer sovereignty. " The economy is flexible and can respond quickly to changing consumer demand. Disadvantages " Income and wealth may be unevenly distributed, resulting in great differences between the rich and the poor. " The economy experiences periods of 9 boom and bust. " Unemployment and underemployment may occur frequently. " Consumers can be manipulated by producers through advertising. " Producers can influence prices through the creation of monopolies and cartels. " Not all resources are used efficiently or effectively, and externalities (costs borne by society) can be created. Conclusion Capitalism is an economic system, organized to deal with scarcity, that is essentially unorganized, It believes that if each individual seeks personal profit, then the whole system will be self-regulating. Individual freedom, private ownership, and competition free from government interference are the principal characteristics of capitalism. You are aware that many of the ideas and practices of a market economy are found in Canada, but that Canada is not exactly a cfree d market system because the government 9s role in Canadian economy is quite significant. The Mixed Economy notes will explain why and how the government has become so involved in our market economy.

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