Market Economy: Supply, Demand, and Economic Systems
Market Dynamics: Supply and Demand
A higher price leads to less quantity demanded, while a lower price results in more quantity demanded. The market demand curve illustrates the relationship between the quantity demanded of a good for all individuals and its price, assuming other factors like income, tastes, preferences, and prices of related goods remain constant.
Supply in the Market
The supply of a particular property depends on several factors, including technology, prices of production factors, and the price of the property itself. Assuming all factors remain constant except the price of the good, less is supplied at lower prices, and more is supplied at higher prices. Therefore, the market supply curve demonstrates the relationship between the quantity of goods supplied by all producers and its price, holding other factors constant.
Essentials of a Market Economy
Producers will market goods and services that are profitable and in demand. Consumers can choose what they buy within their means, always seeking to maximize total satisfaction. People can buy or lease the factors of production, becoming producers and providing goods and services demanded by the market. Changes in demand or supply of goods lead to changes in the price of goods, enabling prices to balance supply and demand.
Advantages of a Market Economy
- People can choose, produce, and consume according to their preferences and availability.
- The pricing system ensures that surpluses or shortages of goods and services do not last long.
- The price system is free, requiring no state intervention (unlike, for example, with benzene).
- Individuals have a financial incentive to act productively.
- The demand for goods and services determines the supply.
Limitations of a Market Economy
Income is not evenly distributed; it is distributed according to the ownership of resources and current wages, leading to marked differences.
Market Failures
- Imperfect Competition: In many markets, one or more participants have the power to influence prices (monopoly, oligopoly, monopsony, etc.).
- External Factors: External factors such as pollution are not addressed by the market.
- Public Goods: The provision of public goods distorts the market. Consumption by one individual does not reduce the amount available to others, and use cannot be eliminated, making it difficult to assign a cost (e.g., national defense, public safety). These are usually not offered in sufficient amounts, even if their production is beneficial.
Property or common property resources tend to be exhausted. These are resources whose services are used in production and consumption but are not owned by any particular individual, such as fishing banks or mountain pastures. Advertising can be used to manipulate consumers, creating artificial needs. Market economies tend to be unstable, suffering crises both internal and external (e.g., the subprime crisis in Asia).
Economic Systems: Central Planning vs. Mixed Economy
Central Planning
It is argued that the market system implies unemployment and frequent crises involving serious waste of resources. Central planning aims to avoid these issues. In centrally planned economies, the means of production are owned, and key decisions are made by a planning agency or central authority.
The Central Role of Power
The central authority distributes the means of production, both material and financial. It determines how to allocate production to different plants and ensures each has the inputs needed to achieve the planned output.
Operation of Companies
The main objective of companies is to maximize benefits and profits. However, in centrally planned economies, companies do not base their actions on economic calculus (profit maximization) but implement the plan at all costs. Companies may go bankrupt, and not all companies are socially useful, even if some are in deficit. Resources are transferred from the central level to cover these deficits.
Mixed Economy
In countries like Sweden, France, the UK, and Spain, social practices and planning mechanisms have been introduced. Some key industries have been nationalized, and special care has been given to income redistribution, leading to the term “mixed economy.” In a mixed economy, the public sector collaborates with private enterprise to answer questions about what, how, and for whom the whole of society produces.