A Market Economy also known as Capitalistic Economy is that economy in which the economic decisions are undertaken on the basis of market mechanism by the private entrepreneurs. It functions on demand and supply conditions. In USA, Japan, Australia, ** and other countries we can see Market Economic systems.
In market economy, private individuals own the factors of production. Here, profit is the sole motive. There is least intervention by the Government.
Price mechanism plays a major role in market economy. It is a balancing wheel of the market mechanism. Prices coordinate decisions of the producers and consumers. The price is determined by demand and supply in the market. No individual organization or Government is responsible for the production and distribution or pricing of goods. All depend on market mechanism).
Regarding the basic problems of an economy, the problem of “What to produce”, is solved on the basis of demand and profit. The producers produce those products which bring more income.
The problem of “How the goods are to be produced”, is determined by the competition among different entrepreneurs. They select the least cost combination of technology so that they can get more returns with less cost.
In Market Economy, the/problem of “For whom to produce”, is decided on the basis of purchasing power of consumers. The producers produce commodities for the rich as they can afford to pay more but poorer sections of the society get neglected.
In Market Economy, profits and losses play a predominant role in growth and development of every producer.
