A market economy is based on several fundamental laws. They developed over several centuries. The origin of these factors determined how economic laws operate in a market economy.
Fundamental principles
No market would have appeared without the desire of people to make a profit. Initiative entrepreneurs who create their own companies, produce goods and services and offer them to the consumer, are one of the most important pillars of a free economy. However, not a single businessman could develop his business if different forms of ownership, as well as means of production, were inaccessible to him. It is these phenomena that help to understand how economic laws operate in a market economy.
The ratio of supply and demand creates the price of the goods. In another economic system (planned), it is determined by the state. Moreover, the authorities are guided only by their own ideas about the correctness of their own decisions. The market is independent of the state, therefore, prices are determined freely.
An economy in which there are no government barriers should nevertheless be regulated by law. First of all, this principle relates to the establishment of relations between enterprises and private individuals (in other words, business entities).
Competition
The main feature of a market economy is competition. This is a struggle between different entities for profit, production, customers, etc. The conditions for their rivalry may be different. For example, experts emphasize perfect competition. It is possible if there are a huge number of companies on the market, none of which can dictate terms to their opponents. As a rule, this situation develops in a new industry. Signs of perfect competition is an unlimited number of market participants, as well as a free price rate.
But the market situation may be the opposite. In addition to perfect, there may be imperfect competition. Under these conditions, one of the manufacturers can influence the market and harm its competitors. There are many methods for this (setting dumping prices, creating barriers for the appearance of opponents in the industry, etc.). A market economy can lead to the formation of monopolies, when one company controls its entire segment. In this case, the prices and quality of goods or services are dictated by only one side.
The law of supply and demand
In 1890, the English economist Alfred Marshall formulated the features of the operation of economic laws in a market economy. His main theory was the idea of the relationship between supply and demand. These two indicators are the most important characteristics of any market economy.
The principle of law is as follows. The lower the price of a product, the more consumer demand for it and less supply from manufacturers. The reverse is also true. As a rule, the price is set at an equilibrium point, which is facilitated by economic laws in a market economy. How do these principles work? To answer this question, first of all, it is necessary to precisely determine what demand is.
This term was formulated in the 19th century. Demand is a request of a potential or actual buyer to receive a certain product in exchange for some funds. This characteristic shows the two most important features of the consumer - his desire to purchase something and his ability to pay for the desired value.
Demand elasticity
An important characteristic of demand is its elasticity. This term refers to the reaction of the buyer to changes in prices for goods. To determine it, there is a special coefficient that is influenced by economic laws in a market economy. Their action is such that the presence of competing products is extremely important for the buyer. Suppose that the price of one car model has increased. If the buyer knows that he can buy a similar car for less, his choice will be decided in advance.
The market system is such that it is not profitable for competitors to raise prices if their opponents have lower cost of goods. This relationship regulates company policies better and more effectively than antitrust laws. It is influenced by objective economic laws in a market economy.
The elasticity of customer demand has increased tremendously in the last decade due to technological advances. The availability of the Internet and free access to any information allowed consumers to quickly find out the state of prices for the same product from different companies. This is a great example of how the laws of the economy operate in a market economy.
Engel's Law
Each person chooses their purchases based on their own earnings. Well-being directly affects what a consumer can afford. In the 19th century, this relationship was investigated by Ernst Engel, a German scientist who became the creator of important scientific theories.
The economist noted that along with the growth of the welfare of a particular buyer, his preferences in goods change. Engel suggested (and later substantiated his idea) that the less a person has income, the more he spends on food. It is not surprising that poor people cannot afford, for example, traveling often.
However, the German scientist in his theory emphasized the fact that, along with enrichment, the costs of different groups of goods are not growing proportionally. Economic laws in a market economy and their effect are determined by the thickness of the buyer's wallet. If the poor man spends half his income on food, the rich person will spend his surpluses on completely different things, and not on additional food supplies.
Consumption theory
In the XX century, the economic indicators of the advanced countries sharply increased. The so-called golden billion arose. So called the inhabitants of the most prosperous states. In a society in which there is no problem of survival or uncomfortable living conditions, people try to consume more and more. This pattern interested economists. So the theory of consumption arose .
What it is? The main postulate of the theory is the assumption that everyone wants to consume first (buy everything new). Daily purchases, shopping, etc. are all signs of such a market participant. In this theory, consumption is considered the main factor determining the effectiveness of the economy.
Pareto Law
Important for any economy is the problem of the proper organization of any production activity. Both the state and businessmen are faced with a choice: how to distribute their resources in order to achieve maximum efficiency from the enterprise or company. There is a universal Pareto law, which states that 20% of the efforts give 80% of the total result, and the remaining 80% of the efforts give only 20% of the result.
What does this mean in practice? Each owner must determine how to properly optimize his company so that a minimum of important actions gives the maximum possible result. This is the problem of economic efficiency.
Of the many market factors, only a few are heavy. That is, the correct single actions can lead to an important result. At the same time, dozens of wrong decisions will not give half the benefit. Pareto law is especially important for businesses and entrepreneurs. Successful companies work only in certain market segments, where they can get the most profit with the least effort.
Impossible Trinity Theory
In the modern world, states cannot achieve several mutually exclusive results at once, as economic laws state. How do the economic laws of today operate in a market economy? There is a hypothesis about the so-called impossible trinity. It lies in the fact that it is impossible to simultaneously achieve a fixed exchange rate, freedom of capital, as well as independence in monetary policy.
This theory was proposed by 1999 Nobel Laureate in Economics Robert Mandell. This economic law forces states to choose a certain course in their policies, receiving some market advantages at the expense of others.
Price law
Many factors determine how economic laws operate in a market economy. Some of them interact directly with each other. One of the most important and determining laws for the market is the law of value or the law of prices. It states that the goods are sold at a cost that corresponds to the amount of labor invested in it.
Most of the products of economic activity are produced by several manufacturers at once. In order to adequately evaluate the invested labor of different parties, an equivalent exchange is necessary. Before taking part in it, the manufacturer must begin to offer goods that are important to society and are in demand. This is an important factor, without which there will be no profit. In addition, any company must evaluate its costs. In order to receive income, the producer needs to keep his costs at the level not higher than socially necessary. This is how economic laws operate in a market economy.
Law of market equilibrium
In the modern world there are various economic laws in a market economy. How do these norms operate in an ever-changing system? The market economy differs from the planned one in that it is impossible to predict in which direction it will move tomorrow. Free trade and entrepreneurship generate many factors that influence prices.
Based on these data, experts formulated the law of market equilibrium. It comes at a time when the volume of supply and demand is compared. The main regulator of this ratio is price. Demand and supply allow economists to determine how much resources and goods are needed for a common economy. When a market equilibrium sets in, it is in the hands of both producers and consumers.
In such a situation, buyers are offered exactly as many products as they can afford. There is no more important condition for the operation of economic laws in a market economy. With this factor, the manufacturer does not have to get rid of surplus goods, which causes him losses. Market equilibrium allows the owner of products or services to grow rich and develop their business, which is beneficial to the entire economy.
Cons of the market
The market economy also has its direct drawbacks. Such a system cannot guarantee all people social equality. This is especially true of the situation with the distribution of income. The market is designed in such a way that some are necessarily getting richer, while others can be impoverished.
Such an economy does not always provide all citizens with work. In a market economy, each person has to take care of himself independently. The UN estimates that over the past fifty years, the gap between rich and poor has more than doubled. This pattern is the object of criticism of supporters of leftist ideologies and opponents of capitalism.