Market system is an institution or organization that brings buyers and sellers together. There are some special characteristics which enable a good functioning of it: freedom of enterprise and choice, limited role of government, private property, competition and self-interest as the dominant motive of market’s existence.
Freedom of enterprise and choice
In order market system to exist all economics units have to make choices which are expressed in market’s economy. Freedom of enterprise allows entrepreneurs and firms are able to obtain the resources they need and produce the goods they are willing, and have the ability all these goods in the market of their choice. Freedom of choice ensures that owners of firms are able to employ and dispose their property and their financial resources as they want. It allows workers to get the job they are specialized for. In the last case, it enables buyers to get the good they are willing and able to pay for.
Limited Role of Government
In market system government should be active but it has a limited role, since markets are managed by “invisible hand”. However, there are some problems, like spillover costs, that can’t be solved if government isn’t activating.
Private Property
This characteristic of market system is one of the most important, because individuals and firms, not government, owe most of land and capital that gives capitalism its name. The right of private property enables the individuals to use their entrepreneurial ability and resources as they see fit.
This right acts as an incentive because it encourages investment, exchange, expanding of business, innovation. Property rights facilitate exchange between two people, because it ensures who is legitimate owner of sold item. Property rights enable people to use their time and resources to produce more goods and services, than to protect property that they have already produced.
Competition
The market system promotes competition among economic units. Competition requires:
- Independent buyers and sellers.
- Freedom of seller and buyer to enter of leave the market when they want.
When there are independently acting sellers and buyers nobody can dictate the price of a good. If a seller can restrict total supply of a good, then he can control the price of it. However, this situation is impossible to occur in a market where suppliers compete. An economic unit that raises the price in this case may lose a part or whole its production and revenue to other suppliers.
Competition also implies that a producer can enter or leave an industry. This characteristic offers efficiency to our market system. Freedom of entry and exit helps economy to adjust to demand, taste and resource availability. Competition is the most important regulation force in market system.
Self-Interest
In market system self-interest isn’t selfishness, but motivating force for all economic unit to produce the goods and services they want and that will offer more revenue to them. This means that suppliers will try to do what is the best for them. Entrepreneurs try to maximize revenue and to diminish loss. Workers try to maximize job benefit by finding the job that offers a best combination of wage, working conditions and less working time. Consumers want to get what they need at lowest price and relative highest quality, so maximize utility of good they bought.
Market system is an organizing mechanism. It elaborates a network through which individual’s choices are recorded, summarized and balanced. Ones who obey the market rules are rewarded with greater revenue, others are penalized and support high loss. Through this mechanism society dictates what economy should produce, what will be the price of goods sold and how the production can be organized.
Key Terms:
Private Property-The right of private persons and firms to obtain, own, control, employ, dispose of, and bequeath land, capital, and other property.
Freedom of Enterprise-The freedom of firms to obtain economic resources, to use these resources to produce products of the firm’s own choosing, and to sell their products in markets of their choice.
Freedom of Choice- The freedom of owners of property resources to employ or dispose of them as they see fit, of workers to enter any line of work for which they are qualified, and of consumers to spend their incomes in a manner that they think is appropriate.
Self-interest-That which each firm, property owner, worker, and consumer believe is best for itself and seeks to obtain.
Competition-The presence in a market of a large number of independent buyers and sellers competing with one another and the freedom of buyers and sellers to enter and leave the market.
Finance & Economics!!! 