Functions Of Market Economy

Part 1 – Outline and explain what is meant by the term ‘a market economy’? Fully explain how such a market functions in theory and in practice.

A market economy is a free market system. The decisions on production and consumption, resource allocation, and prices levels are all decided by a collective of self-interested individuals and organizations, rather than the government. Though the market is not entirely free, it is occasionally limited by government intervention. This, however, is normally to promote competition or encourage or dampen demand.

In theory, a market economy’s base is on the cornerstones of the principles of supply and demand. In this way, the market is meant to respond to changes in demand for particular goods and services.

No one person has all the knowledge required to produce even one of the millions of the most basic products out there. No one person has all the knowledge on how sectors of economies interact and come together to provide a well-rounded understanding of where exactly all the materials and know-how to make a basic product has come from. Following logic, this would mean there would be no single power, person or government institution in the world that would have all the relevant knowledge and know-how to run a specific sector all by itself. Even the most basic pencil would be a struggle to produce efficiently, not even bringing into account the vastly more complicated pieces of machinery needed to produce them. Bearing this in mind it would be easy to see how a centrally planned economy will fail every

The idea of free markets and minimal government control was looking like the right way to go. Where once the world strived for a system much like that of the soviet union’s. From the Kremlin in Moscow, every aspect of Russia’s economy was controlled with the aim of becoming a stronger and more self-efficient country. To the rest of the world, this type of economy appeared to be working incredibly well which threatened the economic revolution. A different story was revealed once Oleg Gordievsky, a spy for the British government informed the government that 1/3 of Russia’s economy was being devoted to military spending. Eventually, it came out that Gordievsky’s estimation was under, with over fifty percent being devoted to military spending. It became evident that Russia’s might was resting on a now collapsing economy. Despite their centrally planned system having brought about the rapid industrialization of Russia. Russia’s industries were becoming inefficient due to a lack of competition and no incentives to work or innovate. This was noted in a report written by Grogoriavinsky about the miners. This is the result of a centrally planned, closed off economy. Without outside competition, there is no reason for people to innovate. When there are no opportunities to better a person’s living standards for themselves and their families there is no reason to put in a hard day’s work, if the outcome is going