Market Mechanism in Economics

Market mechanism in economics

The main focus of economics is how societies can satisfy their wants as fully as possible, given their limited resources for providing the items that satisfy such wants. Amongst many explanations offered, market mechanism is more generally defined as the process by which a market provides a solution for allocating resources and making decisions about the quantity of goods and service that should be produced without involving the government.

Economics is more commonly defined as, the science which studies human behavior as a relationship between ends and scarce means, which have alternative uses. Thus economics is about people and the choices they make.

Market mechanism has been generally defined as:
“The market mechanism is the process by which buyers and sellers, acting in their own interests, establish a market price and determine the quantity of a good exchanged in a market. Buyers (consumers) attempt to improve their well-being by obtaining goods and services for consumption at the lowest possible prices. Sellers (producers) seek to earn profits by selling goods and services at the highest possible prices. However, in a competitive market neither buyers nor sellers can control the market price. Furthermore, both buyers and sellers must have good information about relevant alternatives, and they must be able to purchase or sell in a variety of geographically separated markets if the market outcome is to be efficient. A market that satisfies certain characteristics–many buyers and sellers, good information, and trader mobility–and in which relatively homogeneous (identical or nearly identical) goods are traded is said to be competitive. In such a market, price is determined by the interaction of buyers and sellers, and the competitive process of price determination establishes market equilibrium.”

The study of market mechanisms becomes vital, as we know that there is scarcity of resources and the study of economics in essential is to find a solution to the scarcity problem by, namely, by tradition, by command and by markets. In the market (capitalist/free-enterprise) solution, the set of goods and services to be produced is determined by the interaction of consumers, who are willing to pay for them, and producers who are willing to supply them in response to the market prices.

Thus, in capitalist societies, competition determines not only the prices for resources to produce goods and but also the distribution of income among resource owners. It must be noted that the capitalist system, even though a free market system relies on government or some other form of collective action to produce certain public goods like national defense. Thus it can be said that all economies that fall under the capitalist system have significant sectors of government control and planning

It must be highlighted that there are some areas of economic activity where reliance on the market mechanism will not provide for an efficient allocation resources, as a result of which, it will prevent a nation enjoying the optimal combination of goods and services, which are represented on the production possibility curve.

There are essentially two types of goods – private good, is the one that the person buying is the sole consumer of the good; public good is one which other people can consume without paying for it. As Gwartney et.al (2000) state that public goods are difficult to provide commercially through the market place because there is no way to exclude non-paying customers. Thus the two characteristics which make a good a public good is (1) joint-in-consumption and (2) non-excludable. Joint-in-consumption refers to when many individuals can share the consumption of the same unit of output and thus additional consumption by one person does not reduce the amount available to others.

In other words, marginal cost for public goods is zero. Non-excludable refers to the fact that the good is available to all consumers irrespective of whether they pay for it or not.

BIBLIOGRAPHY:

1. Gwartney, James D., Stroup, Richard L., and Sobel, Russell S., Economics Private and Public Choice, (2000), Ninth Edition, The Dryden Press
2. www.economist.com

Bibliography: 1. Gwartney, James D., Stroup, Richard L., and Sobel, Russell S., Economics Private and Public Choice, (2000), Ninth Edition, The Dryden Press 2. www.economist.com