Examples of Market Economy and Non-Market Economy
Depending on the level of government control or regulation, the economy can be considered a market economy, a planned economy, or a non-market economy. In a market economy, the supply and demand of goods and services regulate the economy, keeping prices low. In a planned economy, however, the government is heavily involved in the process, either directly or indirectly.
Supply and demand regulate the economy
Using the law of supply and demand is a useful tool in understanding the market. It helps investors and entrepreneurs understand how market conditions are affected by demand and supply. The law states that the level of demand for a product will decrease as the price increases and increase as the price decreases.
A market economy is a monetary system where buyers and sellers decide what to produce and what to sell. These markets are not controlled by government. These economies thrive when buyers are satisfied and sellers are motivated to produce efficient goods and services. Market economies do not prioritize income inequality. They are driven by competition and consumer preference.
Price determination is based on two basic principles: supply and demand. Supply drives up price, while demand drives down price. Changes in either demand or supply will shift the price to a new equilibrium. When the equilibrium price is reached, the quantity of goods is equal to the demand for that particular product. The price tends to return to its equilibrium unless demand or supply change.
The law of supply and demand also explains how market prices are shaped. When supply and demand are in balance, they tend to follow an upward slope from left to right. However, external factors such as economic cycles and substitute goods can affect the position of the supply and demand curves.
The law of supply is a simple concept: higher prices stimulate supply and lower prices discourage supply. The law also states that the supply of an economic good will increase when the price of that good is higher and decrease when the price of that good is lower.
Competitive pressure keeps prices low
Whether you are a shopper or an economist, you have probably come across the word competition in your day-to-day life. The concept is simple: firms compete to gain customers, and consumers compete to get the best deals on the products and services they need and want. Obviously, if a firm can raise its prices above its costs, it will face competition from rival firms.
The competition may be local or global, but the competitive pressures are the same. Increasing the supply of a product or service lowers its price, and increasing demand raises the price to match. It is a market economy after all. And if the market has competition, the economy is efficient.
A market economy, in this context, is a place where businesses compete for customers, buyers and suppliers. In a nutshell, the competition is good for the consumer, as it keeps prices low and allows people to find the best deal for the product or service they are looking for. The competition also makes the best use of a firm’s limited resources, such as manpower and capital. And as an economist, I can attest that it is indeed a worthwhile feat to try and eek out a competitive edge.
There is one drawback, however: The competitive pressures can cause firms to underproduce. Often, a monopolistic firm will charge a price that is higher than it should be. It may be a good idea to have a competitive price to make sure you can compete with your rivals. The market might be an efficient place to conduct business, but you have to make sure you have the resources to stay ahead of the competition.
Mixed economies exhibit characteristics of both market and planned economies
Across the world, most of the largest economies have evolved into mixed economies. While each economy possesses its own unique traits, mixed economies generally follow characteristics of both market and planned economies.
Market economies are characterized by the free market system. This system determines the goods produced. Producers compete for consumer money by producing products or services that meet customer needs at the best price. Unlike planned economies, market economies are almost entirely private-owned.
The United States, Japan, and Germany are examples of market economies. These economies also have important freedoms for businesses. The Fifth Amendment protects private property and encourages innovation in market economies.
While these economies do not always have perfect results, mixed systems have helped encapsulate the complex nature of real-world economies. Countries that have transitioned from command economies to mixed systems have seen significant increases in GDP.
Mixed economies often lean towards government intervention, but they can also include elements of free markets. Government intervention can take the form of subsidizing certain industries or changing market signals. Governments can also plan programs to improve economic performance in priority sectors.
These economic systems also vary in how resources are distributed. A market economy has a lot of competition, but it also limits the abuse of economic power. It rewards the most efficient producers, and it ensures that consumers are getting the best value for their money. The most efficient producers can also meet customer needs more creatively, and they can invest their capital in more businesses.
Mixed economies also have important freedoms for consumers. Consumers are free to buy and sell as they see fit, as long as it’s legal. The government has a limited role in economic decisions, but it can be used to regulate the free market. It can also regulate voluntary transactions, restricting those that do not benefit the economy as a whole.
Non-market economies are heavily regulated or controlled by the government
Having said that, the most regulated economies are prone to corruption. This is most obvious when state-sponsored theft of intellectual property occurs. In fact, a cursory review of the OECD’s list of world economies reveals that no single country represents the majority of the world’s population.
The most regulated economies are also the most politically divided, which makes it a prime target for any kind of nefarious activity. Some countries even have laws on the books to prevent such activities. In any case, the rule of thumb is that a nation with high regulatory standards and a low level of corruption will produce an economy with a lower tax burden, and a smaller shadow economy. Obviously, this is not the case in most developed nations.
The most regulated economies also tend to have the highest unemployment rates. This is in part due to the fact that government-mandated regulations tend to raise the cost of labor for firms in the official economy. It’s no wonder, then, that many economists are concerned about the emergence of the shadow economy. This is especially true in countries like China where government control of all facets of the economy has spawned a burgeoning shadow economy. This is not to mention the fact that China’s GDP is a mere one percent of the global total.
In addition, the most regulated economies also tend to have the lowest tax rates. This makes them ideal for corporate tax avoidance and the aforementioned tax evasion. To this end, it’s no wonder that the United States has a number of regulatory bodies to contend with. One of these is the Office of Federal Contract Compliance Programs (OFCCP). This organization has an impressive list of accomplishments.