A market economy is a type of economic relationship in which fundamental economic decisions are made by decentralized methods. Such an economy functions through the market as a form of relations between individual business entities, independently and without the help of other decision makers.
In theory, the concept of a perfect market exists, which is considered a market in which one value per product is set at a certain time. For this, it is necessary to observe several conditions: regular and high demand, a large number of business activity participants, mobility of the main production factors, free access of participants to information and free competition among sellers and buyers.
A market economy, as a rule, does not have all of these features at one time. Therefore, it is not a perfect market (pure market economy) that functions in reality, but a competitive market. For its normal operation, the implementation of various forms of ownership (cooperative, joint-stock, public, private, etc.) is required. In addition, the development of market relations requires the creation of a developed infrastructure, which includes such components as the market of factors of production, the market of products and services, the money market.
A market economy is characterized by the interaction and mutual influence of these three markets. When they reach equilibrium, a general macroeconomic equilibrium sets in. This is possible if, as a result of the interaction of demand and supply in the market of goods and services, an equilibrium level of production and prices is achieved, in the capital market - the corresponding level of loan interest, in the market of factors of production - a stable balance of costs and factors of production.
The essence of a market economy depends on the implementation of all these conditions. The market performs several critical functions in the economy. It is regulatory (regulates production, affecting the level of supply and demand), stimulating (stimulates the implementation of scientific achievements, reducing costs, improving the quality of work), information (provides objective information on the assortment, quantity, quality of goods, services), intermediary (the consumer can choose suppliers of goods), sanitation (cleans up economically unviable economic units) and social (differentiates the income of its participants).
The market unites in a single system all participants in economic relations - both producers and consumers. Market participants in their behavior are motivated, as a rule, only by private enthusiasm. That is, in fact, they are not interested in the economy working successfully as a whole. Therefore, the coordination of individual decisions on the market is carried out by a market mechanism that links the decisions of individual business entities together through competition and the price system.
One of the most significant characteristics of a market economy is competition. It is competition that is able to restrain individual private interests, directing them to create products that are truly socially necessary. It promotes a more complete and efficient use of limited resources, which are allocated only to cost-effective production. Competition is the basis of control and regulation in the operation of the market mechanism.
In order for the market to function stably and without failures, it is necessary that the main chain of economic processes (production, further distribution, product exchange, final consumption) be developed patterns of human behavior in the economy, which are called economic systems. Today, four main types of economic systems are distinguished : the market of free competition, the traditional economic system, the modern market economy, and the economy of the command system.