Generally, according to economics market mechanisms refers to a way in which money can be exchanged between buyers and sellers in an open system where they understand each other. This mechanism can as well exist in free markets, in controlled or captive markets, where the concept of supply and demand is applied. Normally, private sectors such as individuals or even groups of individuals, allocate resources in the free markets using the force of supply and demand. However, market economics may be interfered by the government leading to economic inefficiency. Mostly, this happens to private goods. Moreover, market mechanism barely optimizes public goods (Myatt, 2007).
According to explorations, the economy works very well when it's applied in free markets, where people have the freedom to work in their own interest, without the government interfering in their work. If people are allowed to trade freely then the economy will grow at a very high rate, and it will result in positive productivity with the help of the unseen hand. Basically, the invisible or the unseen hand is the market forces that have been helping supply 5 and demand 6 of goods to attain equilibrium 4 automatically, especially in the free markets (Sen, 1993).
To allocate resources efficiently, most economists believe that competition has to be an important role to play so as to achieve it. However, competition has enabled various different entrepreneurial firms to reach equilibrium in their performance. In addition, the fundamental theorem of welfare is used in evaluating market mechanism in the current economics. This theorem is applied mostly in markets with perfect competition and with a concentration on the market equilibrium rather than its state of imbalance (Sen, 1993).
A market has many structures but microeconomic principles concentrate more on perfectly competitive markets. All market mechanisms have a rise and fall of economic growth hence it follows a business cycle, which is normally managed by the government. A business cycle has four stages which include expansion, peak, contraction, and trough. Nevertheless, in microeconomics, there is also a deflation condition where country experiences lowering prices. Deflation 7 is a very complex economic force that can affect a country (Myatt, 2007).
The Solution Proposed by the Unseen yet Apparent in Market Mechanisms
Basically, market mechanisms can either be unseen or seen. In addition, the price mechanism is considered as invisible while any authority such as the government is considered as visible. The government inhibits the invisibility of the markets by coordinating its activities. Most people have different desires to improve their market circumstances, therefore they plan, calculate, and make choices which will help them attain gain through the market. However, people take different action in an economy to privately own a production, especially in the market process (Mathews, 2012).
The unseen hand working on the market mechanism is not considered as a perfect competition, mostly in the neoclassical economics. Nevertheless, most economist advocate for the virtue of the unseen hand against the visible hand, where authorities such as the government intervene. Majority of these economists go against government intervention but it's important to pay taxes so as to assist the poor. Additionally, most economists propose new policies, new technologies, and equipment. They suggest that the government should minimize their reductions.
Failures and Remedies of the Unseen yet Apparent in Market Mechanisms
Sometimes markets are systematically weak, vulnerable to manipulation, unfair, and unstable. This makes it prone to market failure. When a market experiences market failure, allocated resources are not enough. The market outcome can be imperfect with or without the government interference. However, the government doesn't always fix these malfunctions, on the contrary, it continually designs and redesigns the market condition itself (Will Hutton, 2008).
When the distribution of goods and job opportunities in the market are inequitable, free market mechanisms automatically fails. Therefore, in an economy individuals should be able to consume as much as they can without a limitation. The marginal utility of the goods distributed is supposed to be the same for all the consumers in a certain economy. Also, jobs are not supposed to be allocated in a manner that they can be performed without individuals putting extra effort on them. In the most markets, individuals are not paid in accordance with their productivity.
Another shortcoming is the existence of perfect competition, which is considered to be very important for the efficient and proper functioning of an economy, it works for hand in hand with increased production cost in each market. The problem comes in where perfect competition doesn't exist in the real world situations. Private cost can also be exceeded by the negative externalities. Additionally, a market mechanism can fail because of the fairness issue, especially where income distribution is unacceptable. This can only be changed by the government (Will Hutton, 2008).
In conclusion, both the unseen and the apparent working of the market mechanism are very important. Therefore, for an economy to grow and become successful the government need to intervene and the price mechanism should be considered as well.
Mathews, D. (2012). THE VISIBLE HAND? THE ECONOMICS OF ALFRED CHANDLER. Essays in economics and business history.
Myatt, R. H. (2007). Overemphasis on Perfectly Competitive Markets in Microeconomics Principles Textbooks. ECONOMIC EDUCATION.
Sen, A. (1993). Markets and freedom: Achivements and limitations of the market mechanisms in promoting individual freedom. Oxford Economic papers.
Will Hutton, P. S. (2008, November 8). The failure of market failure. Making innovation flourish.
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