Lesson 3: What Is A Market Economy
ACTIVITY:
BY NOW YOU SHOULD HAVE SEVERAL GOOD & SERVICES OUTLINED. THE LESSONS SO FAR SHOULD HELP YOU MAKE BETTER OBSERVATIONS AND COME TO MORE ACCURATE CONCLUSIONS. NOTICE HOW YOUR UNDERSTANDING OF YOUR LOCAL ECONOMY & BUSINESS BEGINS TO CHANGE AS YOU LEARN MORE ABOUT IT.
INCORPORATE THESE NEW PERSPECTIVES INTO YOUR PREVIOUS LOCAL OBSERVATIONS (WHICH GOODS ARE FROM A GOVERNMENT SOURCE, WHICH FROM A STATE SOURCE, WHICH FROM A MAJOR CORPORATION AND WHICH FROM LOCAL SMALL BUSINESS.
NOTICE THE DIFFERENT WAYS THEY PRODUCE THE GOODS TO BRING IT TO YOUR TOWN/CITY AND THE DIFFERENT PRICES THEY USE AND PONDER ON WHETHER A PRICE INCREASE OR DECREASE WOULD MAKE THEM MORE SALES).
What Is A Market Economy?
Adam Smith popularized the idea of the 'invisible hand' that guides market forces. The idea is that the demand of individual and groups of consumers when matched with the supply of the goods that are demanded will create a fixed price which will distribute all the goods (supply) to all the consumers who can afford it (demand). Or in other words, the optimal price to sell your lemonade at so that you sell all of it.
Adam Smith did say that government intervention may be needed to balance the market forces. i.e. a large business can force out a small business, or find a way to cheat or scam consumers etc. (will be explaining this more in 'perfect competition' next). Adding more water to dilute the taste of the lemonade, or using rotten lemons and balancing it out with sugar are lemonade stand equivalents to where your parents ( kinda playing a similar role to Government here) may need to intervene (why? rotten lemons can be a health risk, you could harm your neighbors! Would you want your kids our selling bad lemonade to your neighbors & their kids?).
The following are some extracts to help explain what a market economy is:
From Investopedia:
What Does Market Economy Mean?
An economic system in which economic decisions and the pricing of goods and services are guided solely by the aggregate interactions of a country's citizens and businesses and there is little government intervention or central planning. This is the opposite of a centrally planned economy, in which government decisions drive most aspects of a country's economic activity.
Investopedia explains Market Economy
Market economies work on the assumption that market forces, such as supply and demand, are the best determinants of what is right for a nation's well-being. These economies rarely engage in government interventions such as price fixing, license quotas and industry subsidizations.
While most developed nations today could be classified as having mixed economies, they are often said to have market economies because they allow market forces to drive most of their activities, typically engaging in government intervention only to the extent that it is needed to provide stability. Although the market economy is clearly the system of choice in today's global marketplace, there is significant debate regarding the amount of government intervention considered optimal for efficient economic operations.
From EconomyWatch.com:
Since the government will always have some level of regulatory control, no country operates as a free market in the strict sense of the word, but we generally say that market economies are those in which governments attempt to intervene as little as possible, while mixed economies include elements of both capitalism and socialism.
Note above that in a centrally planned economy EVERYTHING is planned by the government, i.e. how many crops are to be produced, which crops are to be produced, who get how much of the crop and in what proportion (it's like your parents plan and prepare your entire Lemonade stand themselves... and if they add salt instead of sugar you just have to live with it).
This means that if you don't want something (ex. rice) and want something else instead (ex. bread) you have no choice in the matter as the government has made that decision for you.
Also note that in a free market economy subsidies are unheard of as subsidies are meant to either protect a producer of goods or promote the development of an industry. In a free market economy the kind of oil subsidies that exist in the States would not exist. {In the economics model outlined here "regulators" are a form of control for the economic system.}
Related Blog Post:
The Free Market Explained: Jon Stewart Humiliates A "Free Market Conservative" For Faulty Logic
Adam Smith did say that government intervention may be needed to balance the market forces. i.e. a large business can force out a small business, or find a way to cheat or scam consumers etc. (will be explaining this more in 'perfect competition' next). Adding more water to dilute the taste of the lemonade, or using rotten lemons and balancing it out with sugar are lemonade stand equivalents to where your parents ( kinda playing a similar role to Government here) may need to intervene (why? rotten lemons can be a health risk, you could harm your neighbors! Would you want your kids our selling bad lemonade to your neighbors & their kids?).
The following are some extracts to help explain what a market economy is:
From Investopedia:
What Does Market Economy Mean?
An economic system in which economic decisions and the pricing of goods and services are guided solely by the aggregate interactions of a country's citizens and businesses and there is little government intervention or central planning. This is the opposite of a centrally planned economy, in which government decisions drive most aspects of a country's economic activity.
Investopedia explains Market Economy
Market economies work on the assumption that market forces, such as supply and demand, are the best determinants of what is right for a nation's well-being. These economies rarely engage in government interventions such as price fixing, license quotas and industry subsidizations.
While most developed nations today could be classified as having mixed economies, they are often said to have market economies because they allow market forces to drive most of their activities, typically engaging in government intervention only to the extent that it is needed to provide stability. Although the market economy is clearly the system of choice in today's global marketplace, there is significant debate regarding the amount of government intervention considered optimal for efficient economic operations.
From EconomyWatch.com:
Since the government will always have some level of regulatory control, no country operates as a free market in the strict sense of the word, but we generally say that market economies are those in which governments attempt to intervene as little as possible, while mixed economies include elements of both capitalism and socialism.
Note above that in a centrally planned economy EVERYTHING is planned by the government, i.e. how many crops are to be produced, which crops are to be produced, who get how much of the crop and in what proportion (it's like your parents plan and prepare your entire Lemonade stand themselves... and if they add salt instead of sugar you just have to live with it).
This means that if you don't want something (ex. rice) and want something else instead (ex. bread) you have no choice in the matter as the government has made that decision for you.
Also note that in a free market economy subsidies are unheard of as subsidies are meant to either protect a producer of goods or promote the development of an industry. In a free market economy the kind of oil subsidies that exist in the States would not exist. {In the economics model outlined here "regulators" are a form of control for the economic system.}
Related Blog Post:
The Free Market Explained: Jon Stewart Humiliates A "Free Market Conservative" For Faulty Logic