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What Is a Market-Based Economy?
In some countries of the world, economies are centrally planned. This means that the country's government tells its companies and citizens who make goods and provide services which types of things to provide and how much to charge for them. Other countries use what is called a market-based economy. This means that decisions on which goods to produce, what services to provide, and how much to charge for them are determined by supply and demand in the marketplace.
A market, in economic terms, refers to the interactions between producers of a given product — be it a good or service — and the consumers who want to buy what is offered. These interactions take the form of what economists call supply and demand. In other words, producers have a certain supply of a good or service, and consumers have a specific level of demand or need for it. Supply and demand in a market determines the kinds of things producers provide and the prices they will charge consumers.
Manufacturers, or producers, are generally driven by a desire to make money, by selling their product or service to consumers at a price that is higher their cost. Such business owners want to charge as much money as they can so they can make the most money, but consumers, of course, want to pay as little as possible. Generally, the more a producer charges for his goods or services, the fewer people want buy it. Conversely, manufacturers that charge less often have a higher demand. This two-way interaction between a producer's desire to sell for the highest price and a consumer's desire to buy at the lowest price forms the basis for product pricing in a market-based economy. In this economic system, every good is priced at a point that attracts the most customers, so that the total purchases give the producer the largest profit margin.
This supply and demand determine what types of products companies offer in a market-based economy in the same way that this kind of system controls pricing. If there is little to no demand for a good or service, at the price necessary for the seller to make a profit after factoring in the cost of production, then the manufacturer has no incentive to bring that item to the marketplace. As a result, supply and demand dictate what kinds of goods and services are successful in a market-based economy.
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![In a market-based economy, the government doesn't tell companies and citizens which types of products to provide and how much to charge for them.]()
By: bulashenkoIn a market-based economy, the government doesn't tell companies and citizens which types of products to provide and how much to charge for them.
Discussion Comments
There is something called a global economy or a global market these days. Even though each country has its own national economy, it's closely tied to the global market as well. So we can't say, for example, that everything depends on how many goods manufacturers produce and how many consumers are willing to buy them. It's also about global production, trade, international organizations and global politics.
If we look at gas prices in a market based economy like the United States, it's mainly determined by OPEC (Organization of the Petroleum Exporting Countries). OPEC single-handedly determines prices when it decides how much petroleum it wants to put out on the market each year.
So a market based economy is not as independent as it may seem.
@SarahGen-- I'm not an economist but I think that it can go either way. In a market based economy, supply and demand determine prices, like the article said. So if supply is high, prices will go down. Generally, the higher the supply and demand, the lower the prices. If supply is low and demand is high, prices will sky-rocket.
In a planned economy, prices are more stable because the government determines them. Usually this means that the prices of basic goods are low enough for everyone to afford. But the government pays a price for that because it has to fund manufacturers and cover the cost of production.
When the Soviet Union fell, food and other basic goods became expensive and there was a shortage in everything. Because if the prices are determined by the market, things can look vastly different.
As I said though, I'm not an economist. I took economy courses in college. So if we have any economists here, please correct me if I'm wrong.
In a market based economy, are prices usually lower or higher than in a planned economy?
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