What is social market economy

What is social market economy?

Glossaries

According to gradchem, a social market economy arises from the relationship between supply and demand. The social market economy is based on the rules developed in the free market economy. The key difference is that the state intervenes to compensate for social disadvantages. This is intended to guarantee prosperity and social security.

This lesson covers the social market economy. You will find out what the social market economy is and which features can be used to recognize it. We show you the advantages and disadvantages of the social market economy and explain how it is differentiated from other forms of economy. To deepen your knowledge, you can answer a few exercise questions after the text.

English: social market economy

Why is the social market economy important?

Social market economy is important because it guarantees companies freedom of trade. With a few exceptions – z. B. Price fixing – a company can set its own prices. In the social market economy, contracts can be freely drafted and professions can be freely chosen. The state only intervenes when there is a need for action due to social disadvantages.

What are the characteristics of the social market economy?

A social market economy can only exist if the following factors are given:

  • Free market
  • State intervention

Social market economy

A free market

A free market exists when, in particular, the supply side can act freely. In addition to free pricing, this also includes freedom of competition.

Free pricing means that a company can freely set the prices for the products it offers. A restriction in the pricing is specified by the company itself. To make a profit, the price must be higher than the cost of the product. To set the price, a company uses e.g. B. the contribution margin calculation or target costing.

Freedom of competition allows companies to decide whether, when and how a product is produced and offered on the market. The technical and organizational implementation of the manufacturing process and marketing is the sole responsibility of the company.

The buyers is – except for a monopoly – given the opportunity to choose between several variants. You are free to decide whether you want to buy the products on offer at the given price or not. If they decide not to buy, the provider has to lower the price.

State intervention

The state has an impact on the economy and the growth of the economy through its policies. In addition to a stable currency – this is monitored by an independent central bank – one of the goals of the state is to secure full employment. The state fulfills its task by influencing the social market economy in particular through price fixing and taxes.

Means of price maintenance:

To enforce price maintenance, the state can set maximum prices or determine minimum prices.

Tax law offers the state a variety of ways to support low-income citizens and families. So are z. B. Exempt citizens from paying income tax who earn an annual income below the basic tax allowance. Families are supported by child benefit or child allowance and other subsidies. In addition, the state has an impact on economic life in an economy by raising or lowering VAT rates.

Example

To combat the economic consequences of the corona pandemic, the federal government has decided on a family bonus of € 300 for each child. The subsidy is intended to be made available to families with lower or middle incomes in order to support the economy.

Other forms of economy

In addition to the social market economy, there are the following types of economy:

  • Free market economy
  • Planned economy

Free market economy

In a free market economy there is no government intervention. Just like the social market economy, the free market economy is also free of price and trade. This means that companies set their prices and freely determine how their products are sold. Freedom to consume allows consumers to freely choose which products to buy and at what price.

Another characteristic of the free market economy is the freedom to choose a profession and job.

Planned economy

The planned economy is z. B. known in China or Cuba. Central planning is supported by an administrative management team. The goods are owned by the state. As a production goal, all members of the planned economy must work towards fulfilling a certain plan. Prices and wages are set by the state.

What is social market economy