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What Is the Role of Competition in a Market Economy?

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  • Written By: Osmand Vitez
  • Edited By: PJP Schroeder
  • Last Modified Date: 15 March 2014
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A market economy is one where individuals and businesses operate within a legal framework set up by a government. The key factor here is that governments do not interact — or do not do so heavily — with the market. The role of competition in a market economy is often what makes this system work well. In most cases, competition allows for more choices, improves the quality of products through the efficient use of resources, and enhances economic growth through increased investments. In most cases, the results of competition are almost always positive.

Self-interest is one of the key facets in a market economy. It allows individuals or businesses to make their own decisions on how to spend income and invest extra capital. Economists often call this process choice, with more choices making an economy a better option for the needs and wants of many individuals and businesses. Competition can allow choice between name-brand goods and substitute items. For example, an individual can choose between higher-priced, popular shoes or slightly less popular but sufficient sneakers that cost less.

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Economic resources are classically defined as land, labor, and capital. The use of these resources results in the goods and services that are bought and sold. A fourth economic resource is entrepreneurship, which is the ability of an individual to turn the production of economic resources into a successful business. The role of competition in a market economy allows multiple individuals or businesses to use resources efficiently and produce the cheapest products at the best quality. Constant competition further refines a company’s use of resources and forces it to improve products and operations or suffer the consequences.

Growth in a market economy hinges on the use of capital. Competition allows new businesses to start and increase the total production output. When this occurs, natural economic growth is the result. Individuals have better jobs and potentially higher incomes, the demand for goods and services increases, and companies start or increase supply in order to meet the demand. The cyclical nature of a market economy allows for bigger investment and, in turn, more growth and output.

The long-term sustainability of market economies depends on the amount of freedom in a market economy. Private property laws are among the most important in these systems. When individuals can keep the resources or capital they earn, the market tends to succeed for sustainable time periods.

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Discuss this Article

strawCake
Post 4

@starrynight - I wish I could share your positive perspective, but I just can't. I think that in our supposed "self-regulating" economy, big business wins every time.

Big businesses simply have more resources. They can afford to pay more for marketing or slash their prices. Look at what Walmart does to local businesses. It pretty much kills them, because they can't compete with the super low pricing of Walmart.

Competition may regulate the economy. But sometimes, if left unchecked, it does regulate out certain businesses and leave only a few options for consumers.

starrynight
Post 3

@truman12 - Well, I think there will always be local microbrewed beer available. Some people will always prefer "niche" products to mass market products. So I think there will still be competition in the beer industry.

I'm a little bit interested in the implication that new businesses are good for the economy. I never thought about it that way, but I can understand why. As the article said, more competition. More incentive for other companies to lower their prices or make their product better. It makes total sense.

truman12
Post 2

@summing - I like the way you put that. Unfortunately in a lot of cases there is not any real competition. For lots of reasons the market is more rigid or predetermined than ever gets advertised.

A lot of times this has to do with the government. Due to some bad regulations and the lack of regulations in other areas, corporations are allowed to consolidate their interests and deny entry points to competitors. They basically rise to the top of an industry and shut the door to all others. Cynics will say this is just business but anyone who understands basic economics knows how dangerous this is. Everything that is good and organic about the market goes out the window when there is no competition.

One example of this is beer. I heard recently that the beverage conglomerate that owns Budweiser is about to buy the beverage conglomerate that owns Miller. Together they will control almost a third of the worlds beer. That is bad for everyone except their CEO and the stock holders. Its definitely not a good thing for people who like to drink beer.

summing
Post 1

Competition is key to a market economy. A lot of times you will hear people talk about how the free market works organically and naturally and will tend always towards what is most efficient and most effective. If this is true (which is debatable) the entire concept in contingent on the idea of competition.

The theory goes like this. If a business does something poorly, offers a poor product or has a bad price or poor customer service or whatever, they will eventually loose to a competing company or evolve and improve in order to maintain their share of the industry. Competition is key., You always need to feel like there is someone out there trying to do what you are doing better. It spurs you to be the best and stay the best. Or so the theory goes

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