Understanding Market Economies | Social Studies

June 23, 2016

Understanding Market Economies | Social Studies

You’ve recently learned about economic conditions and terms, the impact of competitive markets, and how consumers and producers affect prices. Your understanding of how economies function is becoming extensive. Let’s take your studies a step further and learn about market economies in preparation for the TASC Test Assessing Secondary Completion™ Social Studies subtest.

What is a market economy?

According to InvestopediaTM, a market economy is an economic system where economic decisions and the prices of goods and services are led solely by the combined interactions of a country's citizens and businesses. In a total market economy – sometimes referred to as a free market economy – there is little to no government involvement with decisions directing a country's economic activity.

Investopedia makes an important point that most developed nations today – including the United States – have mixed economies. Mixed economies operate partially according to random market forces (a total market economy) and partially according to centrally planned rules and decisions (where government intervention provides economic stability).

Advantages of a Market Economy

What are some advantages of market economies? Study.com notes that:

  • Innovation is encouraged in market economies because new ideas and products provide a competitive edge and increase the chance for wealth.
  • From innovation, more goods and services become available in market economies and allow businesses to differentiate themselves in the market.
  • Market economies provide:
    • Various options for work
    • Opportunities to develop a business
    • Variations in available goods and services

Disadvantages of a Market Economy

The following are some disadvantages of market economies, according to Study.com:

  • There are large gaps in wealth and mobility in market economies because “wealth tends to generate wealth.” That is, if an individual is already wealthy, it's easier for him or her to become wealthier than it is for an individual with little wealth to become wealthy.
  • In total market economies, there are no supportive programs like unemployment insurance, Social Security, and Medicare, because these programs are made possible through taxation.
  • Damages to the environment and poor working conditions can arise in total market economies because there is a lack of government regulations protecting these entities.
     

The last two disadvantages are paramount reasons why the U.S. operates under a mixed economy. While the government encourages a free-flowing, competitive economy, it also works to protect its citizens, businesses, and environment.

Head over to Investopedia to watch a short clip on market economies and why most western democracies operate under a mixed economy.

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