The market and the market mechanism are a self-regulating system of resources for production, exchange and distribution of goods, which is based on a competitive environment and the interaction of supply and demand, regulated by a free price signal.
In a free-market, decentralized economy, supply, due to competition and price flexibility, adjusts to changing demand, which makes it impossible for a chronic shortage, poor quality of goods and their too narrow range.
The economists of the classical and neoclassical schools, exploring the market and the market mechanism, emphasized that the market is able to automatically restore equilibrium in cases of temporary loss. The regulation of the proportions of production processes is a function of the law of value.
Market and market mechanism reveal their capabilities only in a competitive environment. The greater the deviation of the real market from the ideal model, the less efficient the market mechanism . Monopolies influence pricing processes, which reduces the efficiency with which resources should be used, while revenues are mainly distributed among monopolists. In this situation, there is a need for government intervention in the economy to reduce the effects of the negative impact on the competitive environment of the influence of monopolies.
The market and the market mechanism form prices and allocate resources. The mechanism of market self-regulation includes such key concepts as competition, price, demand and supply.
Demand is a generic term. It describes all potential and actual buyers. Demands the manifestation of the needs of people who are provided with cash equivalents. It does not express the totality of needs, but only the part that is provided with cash. At the same time, the market and the market mechanism satisfy only those needs that are expressed through demand. These do not include services and benefits of collective use, that is, public goods.
Supply , like demand, is a general term. It describes the behavior of potential and actual sellers (manufacturers) of goods. An offer is sometimes defined as a collection of goods within certain price boundaries that are present on the market and can be sold by manufacturers.
Price in monetary terms shows the value of the goods. Price depends on the value of goods and the ratio of supply and demand in the market. Prices are set under the influence of economic laws, primarily the law of value, according to which socially necessary labor costs are based on prices. The price is also affected by the laws of supply and demand. The mechanism of a market economy is manifested in cases of mismatch between the categories of demand and supply in the field of exchange.
Competition is a form of interaction between market entities and the market mechanism, it also regulates the proportions of supply and demand.
Each element of the market mechanism is connected with others in the most direct and intimate way. Price is the main instrument of the market mechanism, coordinating and adapting supply to demand to each other. Focusing on price, entrepreneurs and consumers choose which product to produce or purchase. It is prices that characterize the state of the market.
Elements of a market mechanism are constantly interacting. Demand is related to supply; they depend on the price level. In turn, competition affects all of these categories, combining them into a system. With such an influence of the components of the mechanism on each other, they balance market relations.