A market economic system is a model of the economy that relies on market self-regulation and operates on the basis of commodity-money relations and private property.
In this case, only the buyers themselves and direct suppliers of goods and services form the distribution structure.
The market economic system operates only subject to certain principles in the relations of economic entities.
1. Economic freedom
This principle means that each economic entity is guided by its own interests and is responsible for its actions. The condition for the implementation of this principle is private property, which applies to property, income and productive resources.
For an entrepreneur, economic freedom means the opportunity to start his activity in any field and achieve the goal of maximizing his income from the project by all legal means.
For consumers, economic freedom provides for a wide selection of goods and services, achieving the optimal use of their income in order to obtain the highest benefit for themselves.
2. Competition
This principle means competition for the best realization of one's economic interest. Competition cannot exist without economic freedom, and without it a market economic system is impossible.
Distinguish between perfect and imperfect competition . The first involves several conditions:
- A large number of buyers and manufacturers, so that no one can dictate and determine the price in the market;
- each buyer and seller has the opportunity to freely enter the market (participate in production, purchase or sale) and freely exit from it (terminate its participation), since there are no legal and organizational obstacles to this;
- the goods of a certain market are approximately the same in quality or homogeneous, that is, they do not offer buyers advantages over each other (all buyers are the same for sellers);
- buyers and sellers are equally fully informed about market prices and know the market situation;
- Buyers and sellers are not able to conspire in order to obtain benefits.
Imperfect competition begins when one or more of the above conditions is violated.
The market system most often exists in conditions of imperfect competition, since it is almost impossible to comply with all perfect requirements.
3. Self-regulation
This principle means that, despite the large number of producers and consumers, significant differences in interests, their activities are automatically coordinated, thanks to competition and free pricing. The market economic system implies that prices are formed by mutual agreement of consumers and producers.
This principle of market self-regulation was first formulated by the outstanding economist Adam Smith, who lived in England in the 18th century. In his book “The Wealth of Nations,” he suggested that it is economic egoism, that is, a desire to fulfill one’s interests, that forces the manufacturer to create exactly what customers need, while observing the minimum price of the goods. The "invisible hand of the market" directs the manufacturer to such goals that are not at all related to his original intentions.
This is precisely what we are observing now: a market economy is the best contributor to the development of charity, the social sphere, the development of technology and the improvement of the general standard of living.
Thus, the market economic system assumes that each person, under the influence of his own benefit, will inevitably prefer to perform actions that best serve the interests of society.