Types of Economies. Market and Market Economy

1. Every human being in the world would like to have a high standard of living. The dream of all the times and peoples is a society without scarcity, but unfortunately it exists only in myths. In real world scarcity is a fact of life. To address it, every society must make choices about three basic economic questions: output, input and distribution. These are the questions of “What to produce?”, “How?” and “For whom?”

2. Societies can make their economic choices by the social process of tradition, the political process of command, or a market process which responds to the free actions of individuals and businesses and works through a price mechanism. All three of the processes (social, political and market) are at work to some extent in every society. The kind of economic system which exists in a society depends mostly on the relative importance of these three choice-making processes. According to them economists define a traditional economy, a command economy and a market economy.

3. There have always been disputes of what type of economy is the most efficient. In our diverse and multi-cultural world with societies of different development levels it is impossible to introduce the same model. Let's take, for example, a primitive society. Their main goal is to survive, so families, clans or tribes make economic decisions based on the traditions, customs and beliefs handed down from generation to generation and make up the type of system called a traditional economy, as they don't know any other ways. On a more advanced stage, where a society is being advanced but is still on the way to its benefit, certain control in order to keep social order is necessary. So the government decides what goods and services will be produced and how they will be distributed. And this is just what a command economy is. This type of economy may be considered socially just, but without any competitiveness it leads to stagnation and as a result to social dissatisfaction. So finally, the most proper type by now has seemed to be a market economy.

4. We can hardly develop the idea of a market economy without understanding the concept of a market. What is “a market?” Suppose the government isn't getting involved in the production and distribution choices. And suppose there is no tradition directing the economic activities and choices in the society. Without governmental or social control over the economic choices we are all on our own. But somehow things must be produced and distributed. Otherwise we will all starve! The only way seems like this: if you want something, produce it for yourself!

5. But perhaps you can induce someone else to produce things for you. This great idea might easily be realized. Just offer a high price, and someone will produce and sell whatever you want. And that, in a nutshell, is a market process.

6. Ideally, the market process is only an extension of the way things work in nature. That's the way it is with all the animals and birds – and even plants! The productive ones get to consume and live. The unproductive ones die.

7. The market process modifies this natural “produce and consume” cycle in only one way: it gives each person the opportunity to produce one thing and then consume a different thing. The market process lets you specialize in producing something you are good at, and then trade to get the other things you want on the market.

8. The historical origin of markets is the physical marketplaces which would often develop into small communities, towns and cities. So is it a place? A thing? Neither, it is a concept. If you are growing tomatoes in your backyard “for sale”, you are producing “for the market”. If you mow lawns to earn money, you are producing a service “for the market”. When you spend your income, you are buying “from the market”.

9. In professional terms, the concept of a market may be defined as any structure that allows buyers and sellers to exchange any type of goods, services and information. The exchange of goods or services for money is a transaction. Market participants consist of all the buyers and sellers of a good who influence its price. This influence is a major study of economics and has given rise to several theories and models concerning the basic market forces of supply and demand, which are to be discussed in one of the following chapters of this book.

10. Returning to the concept of a market economy, now we may define it as an economy based on market principles and using market mechanisms for its functioning. In other words, consumers and producers drive the economy. The former are free to spend their money as they wish, to enter into business and or to send their labour to whomever they want. The latter will decide what goods and services they will offer. They make choices of how to use their limited resources to earn the most money possible.