Disadvantages of Market Economy
Despite the fact that market economies have been beneficial for mankind, there are still some disadvantages to this type of economic system. Some of these disadvantages are: – Large companies dominate the market because of economies of scale, – The profits of a company are based on the sale of products, – The profit motive is the primary motivation of businesses, and – The resources of a company are diverted to the manufacture of products that are not of great demand.
Large companies dominate markets because of economies of scale
Economies of scale, such as greater production volume, make large companies more competitive. These firms benefit from lower cost of production, reduced labor costs and extended productive capacities. In addition, they can establish multiple revenue streams to cushion against unforeseen economic changes. These firms can also lower the cost of doing business, undercut small companies, and maximize profits. They are also more likely to receive discounts from vendors. These benefits are most apparent in sectors with high upfront costs.
Large firms often sell a variety of products, such as computers, automobiles, and consumer goods. The products they produce may be slightly better than those produced by smaller companies, but their economies of scale allow them to produce more of them and sell them at lower prices. Larger production volumes also encourage standardization, which reduces waste. In addition, larger firms have access to cheaper inputs, which allows them to procure them at lower prices. They can also finance themselves more cheaply.
Large firms also have multiple revenue streams to help offset economic downturns. They can also generate the biggest splash with the most efficient uses of technology, such as launching an internet portal or developing an aircraft or pharmaceutical drug. They can also undercut smaller firms, which makes them a force to be reckoned with.
Having a profit motive is not necessarily incompatible with social responsibility. Rather it’s a win-win situation. Investing in social action programmes improves the socio-economic environment of a business. In the short term, it may reduce the profits of the firm but in the long term, it will contribute to a more profitable firm.
A business enterprise with a surplus makes a great social contribution. It improves its capacity to serve the community. It may not have the most impressive product, but it’s better than having nothing. A business that offers the best quality product will be able to attract more customers. This is a nifty idea that a business can use to expand the market for its products. A business that is socially responsible can attract more competent employees, who in turn, can produce more goods and services for a profit.
Leads to periods of economic crisis
During a period of economic crisis, the output and investment of an economy are reduced. This is typically accompanied by a significant fall in prices and consumer spending. The fall is often much larger than the fall in GDP. This is due to overextended corporations and households that reduce investment and reduce economic activity. This is usually accompanied by a decline in international trade. This is because prices and demand are impacted by deflation expectations. In addition, a period of economic crisis often results in a rash of business failures, which depress asset prices. This causes a recession.
This type of recession is often more severe than others because it can be a result of a credit boom. When there is an increase in credit, there is a tendency for corporations and households to borrow more than they can afford. This increases debt and reduces the amount of real saving required to fund investments. The low rate of interest, which is usually lowered by central banks, suppresses real saving and skews investment to industries with low rate of interest. Moreover, when a country experiences a recession during a credit boom, the rate of growth in output is usually much smaller than the rate of growth in GDP.