What Are Some Facts About a Market Economy?

A market economy is driven by supply and demand. Producers sell goods for the highest prices possible, and members of the labor force work for the highest wages they can earn. Determinations as to how goods and services are allocated are made primarily by markets.

Competition is a cornerstone of a market economy. While the law of demand dictates that prices rise as demand increases, competition ensures that supply increases when producers recognize there are increased profits to be made. This has an overall stabilizing effect on prices. Government has no role in a market economy other than to ensure equal access to the markets and to make certain that the markets remain open. Innovation is rewarded by increased efficiency and market share, and this leads to greater profits for the best producers. The freedom of choice that exists in a market economy leads to an upward trend in quality as consumers continually demand better products for similar or decreased prices.

Since a market economy rewards competition, it can treat unfairly those who are at a natural competitive disadvantage. A choice must be made about how to deal with disadvantaged individuals. While some societies elect to allocate funds to care for basic needs, others ignore them entirely.