A. Definition:
Market economy has become as a norm and accepted by many developing countries especially in ASEAN and China. A market economy or free market economy can define as an economy system based on the power of division of labor in which the prices of goods and services are determined in a free price system set by supply and demand (Altvater, E, 1993). All economic decisions are taken by individuals and firms with minimal or without government intervention. Meanwhile, all economic decision are act in people own self-interest.
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The market economy also define as an abstract image of interaction among purposeful, “normal human being,” or actor, under given a set of condition (Gunning,P, 2001) included: 1) people just buy what they want within their ability to pay; 2) money becomes necessary; 3) thus, people are forced to work hard in order to get money; 4) firms are aim to maximizing the profit rather than satisfying social needs; 5) people gets what he or she deserves economically and both are responsible for their fates regardless rich or poor (Ollman, B, 1999).
B. Price Influences:
Price plays the important roles in the market economy and price mechanism used to describe the institution of the market allocation of scare resources between competing uses are based on the decision taken each day by consumers and firms interaction.
Price Mechanism Function:
Signaling Function
Market prices will adjust to demonstrate where resources or surpluses are requires, and in contrast, where they are not.
The increase and decrease of prices in the market reflected scarcities and surpluses. Meanwhile, when the demands of product or service are increase because of high demand from consumers, the market prices are increase. This will provide a signal to suppliers to expand the production to fulfill the higher demand of market.
Example: Higher demand signals to produces to step up production – to maximum the profit. Total revenue is higher at price P2 and output Q2
Price
Consider the diagram showing that the demand of iPhone increases and as a result, under the condition of market economy, the producers stand to earn higher revenues and maximum the profit from selling more iPhone at a higher price per unit.
Example (2): Increase in computer supply leads to lower market prices- a signal to consumers that their real income has increased-they can afford to buy more. Meanwhile, increase in market supply causes a fall in the relative prices of computers and prompts an expansion along the market demand curve.
In contrast, increase in the production cost will induce suppliers to decrease supply, while consumers will react to the resulting higher price by reducing demand for goods or services.
The Transmission of Preferences:
Consumers are able to transmit their expression of needs to the producers through the signaling function about the changing of nature needs and wants in the market.
Higher market prices act as an incentive to increase the production under the condition that supplier stand to maximum the profit. Conversely, the market supply is contracts when demand is weak.
The decision-making in market economy is decentralized which mean that the market responds to the millions of consumers and producers’ decisions, and not depend on single body’s responsible for decide the production and quantities.
The rationing function:
When demand is outstrip supply, the prices will serve to ration scarce resources. For example, the price is bid up if the market is shortage of a product and these will leaving only the consumers with sufficient willingness and ability to pay with the effective demand to purchase the product or services.
Example, the prices acts as a rationing function of the price mechanism in the using of the toll road. For the drivers or vehicles are not willing or unable to pay the expensive toll road charges, they will excluded to use the toll road.
Advantages and Disadvantages of Market Economy and Command Economy:
Advantages:
Market Economy
Command Economy
Decisions are taken by individuals and suppliers.
Government tries to stay out and not intervention the businesses.
Market allows doing as they please what they want and how they want.
Prices are based on the laws of demand and supply.
Equality is focused on and serves collective needs rather than individual needs.
The government tries to eliminates all private property and distribute its good equally.
The government control the price with decide minimum and maximum price of goods and services based on their importance.
Government tries to balance the output goals and available for resources.
The government will provide equal health care, education opportunities and make sure all people are fed.
Market economies can adjust to change easily.
Suppliers have ability to change the production instead of having to go through too much government protocol.
Market economies are encouraged rational of self interest.
Suppliers are owned by government and are capable of rapid change for major challenges.
Government is capable to change the production needs into a difference area with rapidly.
Provide variety of goods and services for consumers.
The demand will always be met in a market economy, if there is a demand for a goods or services.
Command economies are very stable and will never have sudden depressions of the market.
Long-term investment can be made without fear of a market downturn.
Disadvantages:
Market Economy
Command Economy
Increased of unemployment levels and poverty with growing the divide between the rich and the poor such like in India and China.
One company easily is forced out of the business and employees to become unemployed and lose the income.
Freedoms to have the goods or services are limited.
Consumers doesn’t have rights to decide what they want and they’re not allow to control the goods or receives they received.
Market economy doesn’t always provide the basic needs for everyone in society.
Weak, sick, disabled and old have trouble providing for them and often slip into poverty.
Government becomes hard with many private businesses to provide adequate defense, education and health care for all the people.
Innovation and quality of work are limited.
Individuals are no reason to work hard since the income received are equalize.
Market failure or downturn cause some companies to become way to powerful and monopoly.
Monopoly may cause the supplier to take advantage of the consumers and charge ridiculously high prices if the government doesn’t step in.
Little focus on consumers wants and needs.
Planners may not detect the consumer preferences, shortages and surpluses with sufficient accuracy and therefore cannot efficiently coordinate the production.
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