What is the Market System?

Key terms
  • market system
  • private property
  • freedoms of enterprise and choice
  • self-interest
  • competition
  • specialization
  • division of labor
  • Five Fundamental Questions
A market system is a method that allows the prices determined in those markets to allocate the economy's scarce resources and to communicate and coordinate the decisions made by consumers, firms, and resource suppliers.

Economic goals emphasized: efficiency, freedom, price stability, growth
Economic goals de-emphasize: equity, security, full-employment

Adam Smith - the father of Market System (1723 - 1790)


The right of private property is included in the market system. (Coupled with the freedom to negotiate binding legal contracts, private property enables individuals and businesses to obtain, use, and dispose of property resources as they see fit.) It also allows for freedom of enterprise and freedom of choice.

In the market system, self-interest is the motivating force of the various economic units as they express their free choices. Competition is the regulative mechanism of the market system; the coordinating mechanism is a system of markets and prices.

The market system motivates technological advance and encourages the use and development of capital goods. The market economy relies on specialization extensively, including the division of labor. The use of money in market systems facilitates the exchange of goods and services that specialization requires.


  • United States, Hong Kong (generally closer to pure market economy)
  • Canada, Japan, Italy, Germany, Sweden (mixed economies, but also lean towards market economy)

Five Fundamental Questions

  1. What goods and services will be produced?
  2. How will the goods and services be produced?
  3. Who will get the goods and services?
  4. How will the system accommodate change?
  5. How will the system promote progress?

1. Profitable goods and services are produced; as long as total revenue is greater than total opportunity cost (TR>TC), firms grow and the industry expands. In consumer sovereignty, consumers are in command, and their dollar votes register their wants in the market.

2. Goods and services are produced by least-cost production. The most efficient technique for firms depends on the available technology and the price of needed resources.

3. Consumers that are willing and able to pay a product's market price will get it. This would depend on income.

4. This question must be answered because market systems are dynamic. For example, if consumers' demand increases in industry X, prices and profits in industry X rises and those in industry Y falls. Firms vary their output, and they enter or exit industries based on prosperity.

5. Increased profits can be used to invest in the accumulation of capital and development of technology to increase standards of living.


  • can adjust to change over time
  • little government interference
  • decision-making is decentralized
  • lots of goods and services are produced
  • freedom
  • high degree of consumer satisfaction


  • rewards go to the most productive

Economics in the News

In the article Capitalism: Use the invisible hand or the heavy hand?, historian, professor, and author Joyce Appleby gave a speech at UNLV on capitalism throughout history. Capitalism, or the market system, is characterized by the private ownership of resources and the use of markets and prices to coordinate and direct economic activity. It is important to analyze economic systems because they are relevant to our lives, as countries "decide" at which point of the polar ends (market system and command system) of the economic spectrum to be at. Appleby believes that "'sometimes stimulus from the government is needed to aright a listing economy'", meaning that a pure market system is undesirable. Also, she notes that capitalism is "not so much an economic endeavor but a fundamental part of social culture and a way of thinking and living by taking risks and creating wealth and profits through innovation". Thus, there are certain economic goals that are emphasized and de-emphasized by each economic system.

In the United States recently, the government has used criticized economic stimulus programs to help banks, which follows Keynesian economics. John Maynard Keynes and archrival Milton Friedman battled politically; Keynes advocated policy responses by the public sectors, including the government, while Friedman emphasized limited government roles. (Appleby respected Keynes because of his logical presentation of ideas and since Friedman's ideas didn't work out when applied.) The problem with these programs is that it is decreasing the "pureness" of the market system since there is more government intervention. In a market system, competition guides self-interest, which in turn furthers the interest of society. Thus, if firms don't succeed in maximizing their profits, they would go bankrupt. The article notes that "there is no way to run side by side experiments to see which works better", regarding the effectiveness of economic stimulation.

Appleby also emphasized that "no one can predict the consequences of cumulative decisions". The unpredictability of cumulative decisions ("to invest or to buy or sell") is the key feature of the market system, which also makes it a disadvantage.

Youtube video clip: interview with Joyce Appleby


Economics- 18th Edition by McConnell, Brue, Flynn.