A market economy is one where individuals and businesses operate within a legal framework set up by a government. The key factor here is that governments do not interact — or do not do so heavily — with the market. The role of competition in a market economy is often what makes this system work well. In most cases, competition allows for more choices, improves the quality of products through the efficient use of resources, and enhances economic growth through increased investments. In most cases, the results of competition are almost always positive.
Self-interest is one of the key facets in a market economy. It allows individuals or businesses to make their own decisions on how to spend income and invest extra capital. Economists often call this process choice, with more choices making an economy a better option for the needs and wants of many individuals and businesses. Competition can allow choice between name-brand goods and substitute items. For example, an individual can choose between higher-priced, popular shoes or slightly less popular but sufficient sneakers that cost less.
Economic resources are classically defined as land, labor, and capital. The use of these resources results in the goods and services that are bought and sold. A fourth economic resource is entrepreneurship, which is the ability of an individual to turn the production of economic resources into a successful business. The role of competition in a market economy allows multiple individuals or businesses to use resources efficiently and produce the cheapest products at the best quality. Constant competition further refines a company’s use of resources and forces it to improve products and operations or suffer the consequences.
Growth in a market economy hinges on the use of capital. Competition allows new businesses to start and increase the total production output. When this occurs, natural economic growth is the result. Individuals have better jobs and potentially higher incomes, the demand for goods and services increases, and companies start or increase supply in order to meet the demand. The cyclical nature of a market economy allows for bigger investment and, in turn, more growth and output.
The long-term sustainability of market economies depends on the amount of freedom in a market economy. Private property laws are among the most important in these systems. When individuals can keep the resources or capital they earn, the market tends to succeed for sustainable time periods.