There is a trite but true old adage, "Build a better mousetrap, and the world will beat a path to your door." While this may be true in any economic system, it is particularly so in a market economy.
A market economy is characterized by private control of the means of production, such as factories, raw materials, and capital. There is also private control of pricing, and private (individual and business) control of buying decisions (consumption). All of these decisions are, in theory, based on enlightened economic self-interest: sellers will try to maximize their profits, while consumers will try to satisfy their needs and wants at the lowest cost.
Another important characteristic of a market system is that it rewards scarcity. A classic model in microeconomics is the monopoly, where supply is restricted to drive up the price, rewarding the seller with a monopoly profit over and above what is needed to produce the goods and remain in business.
A person or firm that develops unique or superior technology and that can effectively protect that technology from being acquired by competitors (through patents, etc. and/or internal security), can effectively act as a monopolist as long as their technology remains both exclusive and superior. This has been the goal of countless inventors and "start-ups" for generations.
The circular flow model is useful in considering the economy's response to a successful new technology. Banks and the like provide financing for both buyers and sellers. Consider, for example, how the success of a new technology is likely to influence lenders in evaluating another new technology in a related field: the more money is coming from consumers of the new product, the more profit the producer is making and the more certain it becomes that loans made to fund the start-up will be repaid.
The market system (more commonly known as capitalism) is a system in which companies are owned by private individuals or organizations with the express purpose of making a profit.
The motivation for technological advancement in a capitalist economy is obvious: the more advanced a company is, the more quickly and efficiently it can operate and the higher its turnover and profits will be.
Creative destruction—doing away with long-established practices to pave the way for innovation—is highly sought after in market systems due to their competitive nature. In order to keep up with one's competitors, a company must constantly evolve.
Three virtues of the market system would be: firstly, there is greater innovation due to the incentive of profit; secondly, there is increased productivity in workers based on the incentive to gain and sustain employment in order to earn capital; and thirdly, businesses are streamlined and more efficient than they would be in a command economy.
This discussion involves circular flow of income because this model exemplifies the classic capitalist lifestyle of earning to spend and then needing to earn more.
https://www.investopedia.com/ask/answers/033015/what-are-some-advantages-market-economy-over-other-types-economies.asp
https://www.investopedia.com/terms/c/creativedestruction.asp
https://www.investopedia.com/terms/circular-flow-of-income.asp
The market system, also simply called capitalism, is a system wherein resources are privately owned and economic activity is generated and directed by fluctuations in the market, including changes in price. There are several virtues of this system which help incentivize technological advance and creative destruction—a process of "industrial mutation" which continuously seeks to improve the existing economic structure by destroying what does not work and freeing up resources to be better implemented (Joseph Schumpeter, 1942). These virtues might include:
1. In a capitalist system, people are working in their own self-interest and in pursuit of their own economic goals. Therefore, it is in their best interest to ensure the system is working as well, economically, as it can, because their ultimate goal is to make more money, which might be best achieved by destroying ineffective mechanisms and generating more efficient technology to achieve ends.
2. In the market system, the existence of the market itself incentivizes suppliers, inventors, merchants, and consumers to work with and compete against each other. Because of this competition, in pursuit of a higher market share, firms are incentivized to try out new things and be continually "better," technologically, than those they are competing against.
3. In a privately-owned market, although there is usually some intervention from the government in capitalist countries, decisions are effectively taken by the consumers and producers, rather than by the government. This spreads the economic risk and drives entrepreneurs to swing the market in their own direction through the production of new ideas and products.
"Circular flow" describes the interplay in the capitalist market which keeps it going and drives innovation: this is the flow of resources and revenue between purchasers and businesses, and between businesses and their suppliers. Economic resources and revenue flow between businesses and households, encouraging consumers to buy, and therefore incentivizing suppliers and entrepreneurs to continually innovate in pursuit of consumer money and purchasing power.
http://highered.mheducation.com/sites/dl/free/0070969523/837456/MicroeconomicsSampleChap02.pdf
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