economics Economics () is the social science that studies the production, distribution, and consumption of goods and services. Economics focuses on the behaviour and interactions of economic agents and how economies work. Microeconomics anal ...

, the market mechanism is a mechanism by which the use of

money Money is any item or verifiable record that is generally accepted as payment for goods and services and repayment of debts, such as taxes, in a particular country or socio-economic context. The primary functions which distinguish money ar ...

exchanged by buyers and sellers with an open and understood system of

value Value or values may refer to: Ethics and social * Value (ethics) wherein said concept may be construed as treating actions themselves as abstract objects, associating value to them ** Values (Western philosophy) expands the notion of value beyo ...

and time trade-offs in a market tends to optimize distribution of

goods and services Goods are items that are usually (but not always) tangible, such as pens, physical books, salt, apples, and hats. Services are activities provided by other people, who include architects, suppliers, contractors, technologists, teachers, doc ...

in at least some ways. The mechanism can exist in

free market In economics, a free market is an economic system in which the prices of goods and services are determined by supply and demand expressed by sellers and buyers. Such markets, as modeled, operate without the intervention of government or any ot ...

s or in captive or controlling markets seek to use

supply and demand In microeconomics, supply and demand is an economic model of price determination in a Market (economics), market. It postulates that, Ceteris paribus, holding all else equal, in a perfect competition, competitive market, the unit price for a ...

, or some other form of charging for

scarcity In economics, scarcity "refers to the basic fact of life that there exists only a finite amount of human and nonhuman resources which the best technical knowledge is capable of using to produce only limited maximum amounts of each economic good. ...

, to choose among production possibilities. In a free market economy, all the resources are allocated by the

private sector The private sector is the part of the economy, sometimes referred to as the citizen sector, which is owned by private groups, usually as a means of establishment for profit or non profit, rather than being owned by the government. Employment The ...

(individuals, households, and groups of individuals); in a

planned economy A planned economy is a type of economic system where investment, production and the allocation of capital goods takes place according to economy-wide economic plans and production plans. A planned economy may use centralized, decentralized, ...

, all the resources are owned by the

public sector The public sector, also called the state sector, is the part of the economy composed of both public services and public enterprises. Public sectors include the public goods and governmental services such as the military, law enforcement, inf ...

(local and central government); and, in a

mixed economy A mixed economy is variously defined as an economic system blending elements of a market economy with elements of a planned economy, markets with state interventionism, or private enterprise with public enterprise. Common to all mixed economie ...

, some resources are owned by both sectors, private and public. In reality the first two are mostly theoretical and the third is common. Resources are allocated according to the forces of supply and demand. Government interference in the market mechanism can lead to economic inefficiency when it is applied to some private goods. Prices convey a lot of information. They not only tell producers what to produce but also inform the producers to produce what people want. The more inaccurate the information gets, the lesser will be the economic coordination which will in turn lower satisfaction of wants. Thus interference in the information conveyed by prices is destructive to

economic development In the economics study of the public sector, economic and social development is the process by which the economic well-being and quality of life of a nation, region, local community, or an individual are improved according to targeted goals and ...

if misapplied or overused. However, the market mechanism often cannot optimize for public goods, owing to problems such as the tragedy of the commons. For example, modern

highway A highway is any public or private road or other public way on land. It is used for major roads, but also includes other public roads and public tracks. In some areas of the United States, it is used as an equivalent term to controlled-access ...

s have been good for economic development, but it has taken government planning and allocation to bring them into existence. Other market mechanisms include government

fiscal policy In economics and political science, fiscal policy is the use of government revenue collection ( taxes or tax cuts) and expenditure to influence a country's economy. The use of government revenue expenditures to influence macroeconomic variabl ...

and

monetary policy Monetary policy is the policy adopted by the monetary authority of a nation to control either the interest rate payable for federal funds, very short-term borrowing (borrowing by banks from each other to meet their short-term needs) or the money s ...

, described by the Friedman rule proposed by

Milton Friedman Milton Friedman (; July 31, 1912 – November 16, 2006) was an American economist and statistician who received the 1976 Nobel Memorial Prize in Economic Sciences for his research on consumption analysis, monetary history and theory and the ...

.M. Friedman (1969), ''The Optimum Quantity of Money,'' Macmillan These policies will influence demand by price adjustments through taxes and charges and through adjustments to the value of money by the related

supply of money In macroeconomics, the money supply (or money stock) refers to the total volume of currency held by the public at a particular point in time. There are several ways to define "money", but standard measures usually include currency in circula ...

References

Market (economics) {{econ-stub

See also

References