How a Market Economy Function

How a Market Economy Function

Describe how a market economy function and the relationships of its major sub-division or aggregates such as government, households and business sector

A market economy is a system that is guided by the pricing decision of goods and services during business interaction. The interaction involves government intervention; however, it more market-oriented interaction (Baldassarri, McCallum and Mundell, 2016).  The market economy functions based on the law of supply and demand, which influence the production of goods and service. Supply includes resources, such as capital, labour while demand includes purchases made by consumers, business and the government (Baldassarri, McCallum and Mundell, 2016). In such a relationship, the business sells its services to the individual willing to pay for the highest price, while buyers seek the lowest prices for what they want to purchase. The supply and demand theory is one of the major concepts of understanding the market economy, the relationship between the supply and demand results to decision in prices and the quantity to be produced and the resources it is allocated.

The market economy function and other major sub-division such as government, households and business sector occur in two cycles that move in opposite directions. For example,  the government provide employment opportunities. People go to work or provide services that people need. Thus, goods and services flow from individuals to businesses and back again to the government in the form of taxation.

To understand how a market economy functions,   for example, any growth in the world’s largest economy would boost global activity because of the size of the economy and the interconnectedness. The increase in the US economy will have a significant effect on the global economy. On the other hand, the global economy will affect the US economy. US corporations and their affiliate companies produce a larger share of the employment, cross border trade financial flow needed to boost the global economy (Kose et al., 2017).  US is the world’s largest producer of gas and oil and changes in US growth prospects is determined by global prices of these commodities which affect the fiscal and balance of exporter payments (Kose et al., 2017).  Any changes in US trade policies will influence global economic activities.

Diagram CO1: US economy linkage to the global economy: the US has the largest share of multinational corporations in US sales, exports and imports of goods and employment.

How do economic systems (central planning versus mixed market

Market economies permit direct interaction of both producers and consumer. Generally, a mixed market involves both private and public within limited government interaction. In many economies, resources are allocated using a combination of market and planning by both the public and private involvement. However, the centrally planned economy has several shortfalls. For example, where the government is heavily involved like in health care, they may be ill-equipped to meet the surplus or shortage government (Baldassarri, McCallum and Mundell, 2016). Additionally, centrally planned economies are influenced by political interests making it not a free market. Some of the market failures in a competitive market are incompleteness and indivisibilities. In a competitive market, certain things are incomplete or missing, such as public goods or common property resources resulting in market failure.

CO2: economic graph: In the US trade policies have resulted in higher levels of consumption than would be possible without trade. However, the situation can also lead to employment losses in other sectors where production is not sufficient.

Two specific examples of how government intervention can improve outcomes in markets that would otherwise fail in a competitive market?. 

The government cab improves outcomes in a failed competitive market by deescalating all monopoly prices using taxation and price regulations. The government can enforce a price ceiling to reduce monopoly pricing or make it equal to competitive prices.  This can be done by setting fixed prices of goods and services below the monopoly prices government (Baldassarri, McCallum and Mundell, 2016).  The government can levy taxes to bring down the monopoly to a competitive level.  Taxes can be in lump sum form regardless of the output. All these strategies can improve outcomes in a failed competitive market.

C05: supply and demand theory to the real world situation

The diagram shows how supply curve shifts leading to a higher price and fall in quantity demand.

References

Baldassarri, M., McCallum, J., & Mundell, R. (Eds.). (2016). Global disequilibrium in the world

 economy. Springer.

Kose, M. A., Lakatos, C., Ohnsorge, F., & Stocker, M. (2017). Understanding the global role of

the US economy. VoxEUorg, 2017.