Market Economy
Market Economy
In a market economy, two societal units are very important: the individual
and the firm. Individuals own resources and consume products, while firms
use resources and produce products. The market mechanism involves an in-
teraction of price, quantity, supply, and demand of resources and products.
Labor is supplied by the household if the firm offers an adequate wage. Prod-
ucts are consumed if the price is within a certain range. A firm bases its wages
on the quantity of labor available to assume a job. Resources are allocated as
a result of the constant interplay between households and firms, as well as
the interplay between households and between firms, such as when the input
of one firm is the output of another. The key factors that make the market
economy work are consumer sovereignty and the freedom of the enter-
prise to operate in the market. As long as both units are free to make deci-
sions, the interplay of supply and demand should ensure proper allocation of
resources.
The market economy has been highly successful in most industrial coun-
tries, especially the United States. Even here, however, a perfect market
economy does not exist because of the influence of three factors: large cor-
porations, labor unions, and the government. The large corporation can
reduce market pressures somewhat by exerting control over the purchase of
resources or the sale of products. Because of the large size of the firm and the
relative smallness of each individual shareholder, there is a wide gap between
ownership and control of decision making. Decisions may or may not be
strictly motivated by the market. The rise in entrepreneurial activities has
challenged some of the assumptions of the large firm and injected some dy-
namism into the economy.
Labor unions evolved in response to the power exerted by the owners
and managers of business over the labor market. Tremendous benefits in
terms of salaries, fringe benefits, work conditions, and bargaining power have
been won by the unions, but market forces have been seriously disrupted.
Many unions control entry into the work force and restrict the freedom of
workers to change occupations in response to supply and demand. Govern-
ment policies continue to shape the U.S. economy. Fiscal and monetary
policies have a direct effect on employment, production and consumption
of goods and services (for example, the military), and the growth of the
money supply. As will be pointed out in Chapter 5, the government also inter-
venes in the free flow of goods internationally through protectionist mea-
sures.
In a market economy, two societal units are very important: the individual
and the firm. Individuals own resources and consume products, while firms
use resources and produce products. The market mechanism involves an in-
teraction of price, quantity, supply, and demand of resources and products.
Labor is supplied by the household if the firm offers an adequate wage. Prod-
ucts are consumed if the price is within a certain range. A firm bases its wages
on the quantity of labor available to assume a job. Resources are allocated as
a result of the constant interplay between households and firms, as well as
the interplay between households and between firms, such as when the input
of one firm is the output of another. The key factors that make the market
economy work are consumer sovereignty and the freedom of the enter-
prise to operate in the market. As long as both units are free to make deci-
sions, the interplay of supply and demand should ensure proper allocation of
resources.
The market economy has been highly successful in most industrial coun-
tries, especially the United States. Even here, however, a perfect market
economy does not exist because of the influence of three factors: large cor-
porations, labor unions, and the government. The large corporation can
reduce market pressures somewhat by exerting control over the purchase of
resources or the sale of products. Because of the large size of the firm and the
relative smallness of each individual shareholder, there is a wide gap between
ownership and control of decision making. Decisions may or may not be
strictly motivated by the market. The rise in entrepreneurial activities has
challenged some of the assumptions of the large firm and injected some dy-
namism into the economy.
Labor unions evolved in response to the power exerted by the owners
and managers of business over the labor market. Tremendous benefits in
terms of salaries, fringe benefits, work conditions, and bargaining power have
been won by the unions, but market forces have been seriously disrupted.
Many unions control entry into the work force and restrict the freedom of
workers to change occupations in response to supply and demand. Govern-
ment policies continue to shape the U.S. economy. Fiscal and monetary
policies have a direct effect on employment, production and consumption
of goods and services (for example, the military), and the growth of the
money supply. As will be pointed out in Chapter 5, the government also inter-
venes in the free flow of goods internationally through protectionist mea-
sures.
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