In order to understand what are the main advantages and disadvantages of a market economy, we will try to understand the definition of its concept and basic functions. A market economy consists of many participants who make independent business decisions. If these solutions were not connected in any way, the system would be chaos. How, then, is the relationship between the individual subjects?
Market
Communication is carried out by the market - the basis of the economy. In an ideal market for the same product the same price is set for a certain period of time.
This is facilitated by:
• unlimited constant demand;
• increase in the number of business entities;
• the maximum possible awareness of these entities;
• freedom of competition, both among buyers and sellers;
• mobility of production factors.
Elements of the market as the main link in the market system
The advantages and disadvantages of a market economy are also determined by the basic elements of the market and the variety of forms of ownership (private, cooperative, joint-stock, state, etc.) to ensure its high competitiveness.
The main elements of market infrastructure:
• finance market;
• market of production factors;
• market of goods and consumer services.
All these elements are interconnected, and if they are normally balanced, then the economy functions without failures.
What problems does the economic system solve?
Before answering the question what advantages and disadvantages of a market economy are decisive, it is important to know why it is needed at all, and what basic problem it solves. Actually, any economy is called upon to solve the global contradiction between the unlimited material needs of society and limited, or even rare, economic resources.
This contradiction can be expressed in five simpler questions:
• what products need to be produced;
• how much;
• how;
• who will consume it;
• how quickly the system adapts to changes in consumer demand.
Depending on the quality of answers to these questions, the advantages and disadvantages of a market economy are determined. These are the main questions that the economic system must answer.
Advantages and disadvantages of the market system
Advantages
• Efficiency of resource allocation.
• Availability of freedom of choice among consumers and entrepreneurs.
• The ability to meet a variety of needs, improve the quality of goods and services.
• The ability to quickly and easily adapt to constantly changing market conditions.
• Initiation of the implementation of the achievements of developing scientific and technological progress.
• Ability to operate in uncomfortable conditions of limited information.
disadvantages
• Fading competition.
• Unevenly distributed income.
• Instability of development and not always efficient production.
• Inflation and unemployment.
• The trend towards monopolization.
• Inability to provide basic scientific research.
Development trends
The system of market relations never stands still - this is its main advantage, and the shortcomings of a market economy are offset by trends to correct them. A large role here is played by state regulation and the changing forms of all types of entrepreneurial activity. New forms of labor relations arise when hired workers take part in the management of an enterprise or firm. The state has the ability to influence the narrowing or expansion of competition. The share of small businesses that are more mobile to changing conditions is increasing. Although profit still remains in the first place, enterprises are interested in maintaining their competitiveness and are taking targeted actions for this. And, most importantly, a market economy is focused on satisfying consumer demand.