A market economy is an economic system where two forces, known as supply and demand, direct the production of goods and services. Market economies are not controlled by a central authority (like a government) and are instead based on voluntary exchange.
Market economies rely on the interplay between
supply
and
demand
to function. “
Demand
” refers to the amount of goods and services people need or want. “
Supply
” refers to the amount of goods and services available for purchase. If the
supply
is low while the
demand
is high, it drives up the price that someone can charge for it. Conversely, if there is a greater
supply
of a certain good and people do not want it as much, the price will go down. The levels of
supply
and
demand
for any given good or service tend to move toward an equal balance—but this equality, if achieved, cannot be held for long, so the tension between
supply
and
demand
creates a fluctuating market.
Market economies have other characteristics as well. The concept of private property is central to the
market economy, because it gives owners the right to sell their goods. Competition is also an important factor, because it affects
supply
and
demand
. When there is more than one seller of a particular good,
competition
to make a sale can drive down the cost of that good—and the buyer has a choice of where to shop, which gives them additional leverage they would not otherwise have.
Market economies evolved from traditional economies where people bartered for goods and services, and did not have a currency. As the concepts of money, voluntary exchange, and individual property rights developed, market economies arose as one of three modern economic systems. Another modern economic system is the command
economy
, where the government controls all economic decisions, in sharp contrast to the
market
economy
. The government sets the price for goods and services and controls the means of production. The other modern economic system is a mixed
economy
, which has characteristics of both a
market
economy
and a command
economy
.
Market economies are tied to capitalism, an economic system where private entities or people own the
means of production
.
Capitalism
needs the forces of
supply
and
demand
in the
market
economy
to distribute goods and services and set prices. Conversely, command economies are tied to socialism and communism, where the collective group owns the
means of production
. Most countries today, including the United States, have a mixed
economy
with elements of both market and command economies.
