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Market Economy Definition

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Market Economy Definition

Basic Concepts of Market Economy

The term ‘Economy’ refers to the conditions in which goods are produced in a country and the manner in which people are gainfully employed. It connotes all the resources of employment and production. In other words, the form of economy tells us how the people of a country are organized for work and getting a living. The farms, factories, workshops, business establishments, shops, mines, roads etc. are the parts in which people work and earn their living. All these organizations and institutions collectively go to form the economy of country.

The economies are classified in a number of ways. One of the most important of them is the market economy. It is also called free market economy or capitalist economy.

Concepts of Market Economy

The economy which is operated by the market mechanism on the basis of price is known as market economy. In this market, the economic decisions regarding production, consumption, exchange and distribution are guided by the market system. The amount of production is guided by the expected rate of profit and the rate of profit is based on the consumer’s Preference. As profit plays the major role in the allocation of resources and economic activities, it is called profit motivated economy. It is the laissez-fair economy without any intervention of the government and it is operated by the forces of demand and supply.

Proper allocation of resources is the main objective of market economy. Resources are allocated through price mechanism. Demand and supply are the two forces of the price mechanism through which resources are allocated in the economy. Law of demand and supply are the basic tools in the above stated decision making process. The consumers use their rupee votes to bu what they want most and the producers use their rupee votes to produce those commodities which seem most profitable to them. This deals the basic aspect of the law of demand and supply.

According to Prof. Benham- “Market economy is the counter of economic dictatorship.”

In the words of Louks and Hoot- “Capitalism is a system of economic organization featured by the private ownership and the use for private profit of manmade and nature made capital.”

In this economy, the economic decisions are made on the basis of individual freedom. All the economic activities are carried out on the basis of independent competition and emphasis is given to personal benefit. So it is the laissez- fair economy. It has the following characteristics.

1. Control of price mechanism        2. Profit motives
3. Economic freedom                     4. Consumer’s sovereignty
4. Private property                        6. Major role of entrepreneurs
5. Control with risk                        8. Competitive system
6. Law of inheritance                     10. Unplanned economy

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1. Control of price mechanism: In market economy, all the economic activities are guided and controlled by the price mechanism. Price level is only one factor that affects and determines the amount of selling and buying or demand and supply. Price regulates and balances all aspects of economic activities.

2. Profit motives: Individual profit is only one motive to operate economic activities in the economy. Factors of production are allocated and used in those sectors which are most profitable. The activities of produces or investors are run due to the motive of profit.

3. Economic freedom: There is the individual freedom in this economy. Individuals are free to choose their occupations, earn their income or property and use their property as they want. Every individual is free to take decision relating to economic activities. There is no liability and intervention of the state except the protection of individual proper.

4. Consumer’s sovereignty: Consumers are the kings in this economy. All of the economic activities are operated to fulfill their wants and need of the consumers. Factors of production are used to satisfy the wants of consumers. As the consumers are the most powerful agents, there is the sovereignty of the consumers.

5. Private property: This economy is the system of individual freedom. Every individual is free to have property. Individuals have the rights to sell their property, earn profit from their property and consumer the property for their benefits or save their earnings. It is motivated by earning of private property.

6. Major role of entrepreneurs: Production is the mother of other economic activities. Entrepreneurs unify the factors of production and use them in the production of goods and services. As other activities are determined by production, entrepreneurs have major role in market economy.

7. Control with risk: There are many types of risks to run business activities. Entrepreneurs bear the risks of business and production sectors. Hence, there is the control with risk bearer which is called the golden rule in business enterprises.

8. Competitive system: There will be competition in every sector of market economy. The competition exists among buyers to buy and demand. There is the competition among the factors of production also for their benefit. This process of competition is carried on collectively in all the sectors. Thus, it is the competitive system of the economy.

9. Law of inheritance: There is the law of inheritance in this economic system. Individuals can decide the inheritator of their property in their life time or after their living. If the property owner does not decide the inheritator, the property right will be of the closet relative of the property owner after his death. Individuals can save their property for their future generation.

10. Unplanned economy: There is the absence of central planning in this system. Every individual has freedom to carry out the economic activities. These economic activities are carried according to the will of individuals. Production decisions are taken by the entrepreneurs in their own will and manners. Hence, the economic decisions are carried out with the motive of profit.

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