economics Economics () is a behavioral science that studies the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods and services. Economics focuses on the behaviour and interac ...

, 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 are: m ...

exchanged by

buyer Procurement is the process of locating and agreeing to terms and purchasing goods, services, or other works from an external source, often with the use of a tendering or competitive bidding process. The term may also refer to a contractual o ...

s and sellers with an open and understood system of value and time trade-offs in a

market Market is a term used to describe concepts such as: *Market (economics), system in which parties engage in transactions according to supply and demand *Market economy *Marketplace, a physical marketplace or public market *Marketing, the act of sat ...

tends to optimize distribution of

goods and services Goods are items that are usually (but not always) tangible, such as pens or Apple, apples. Services are activities provided by other people, such as teachers or barbers. Taken together, it is the Production (economics), production, distributio ...

in at least some ways. The mechanism can exist in

free market In economics, a free market is an economic market (economics), 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 ...

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#Applications, holding all else equal, the unit price for a particular Good (economics), good ...

, 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 A market economy is an economic system in which the decisions regarding investment, production, and distribution to the consumers are guided by the price signals created by the forces of supply and demand. The major characteristic of a market ...

, all the resources are allocated by the

private sector The private sector is the part of the economy 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 private sector employs most of the workfo ...

(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, pu ...

(local and central government); and, in a

mixed economy A mixed economy is an economic system that includes both elements associated with capitalism, such as private businesses, and with socialism, such as nationalized government services. More specifically, a mixed economy may be variously de ...

, 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 In microeconomics, economic efficiency, depending on the context, is usually one of the following two related concepts: * Allocative efficiency, Allocative or Pareto efficiency: any changes made to assist one person would harm another. * Productive ...

when it is applied to some

private good Private or privates may refer to: Music * "In Private", by Dusty Springfield from the 1990 album ''Reputation'' * Private (band), a Denmark-based band * "Private" (Ryōko Hirosue song), from the 1999 album ''Private'', written and also recorded ...

s. 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 economics, economic development (or 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 object ...

if misapplied or overused. However, the market mechanism often cannot optimize for

public good In economics, a public good (also referred to as a social good or collective good)Oakland, W. H. (1987). Theory of public goods. In Handbook of public economics (Vol. 2, pp. 485–535). Elsevier. is a commodity, product or service that is bo ...

s, owing to problems such as the

tragedy of the commons The tragedy of the commons is the concept that, if many people enjoy unfettered access to a finite, valuable resource, such as a pasture, they will tend to overuse it and may end up destroying its value altogether. Even if some users exercised vo ...

. For example, modern

highway A highway is any public or private road or other public way on land. It includes not just major roads, but also other public roads and rights of way. In the United States, it is also used as an equivalent term to controlled-access highway, or ...

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 variab ...

and

monetary policy Monetary policy is the policy adopted by the monetary authority of a nation to affect monetary and other financial conditions to accomplish broader objectives like high employment and price stability (normally interpreted as a low and stable rat ...

, 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 ...

.M. Friedman (1969), ''The Optimum Quantity of Money,'' Macmillan These policies will influence demand by price adjustments through

tax A tax is a mandatory financial charge or levy imposed on an individual or legal entity by a governmental organization to support government spending and public expenditures collectively or to regulate and reduce negative externalities. Tax co ...

es and charges and through adjustments to the value of money by the related

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

References

Market (economics) {{econ-stub

See also

References