What are the advantages and disadvantages of a free market economy?
And what are the roles and needs in the business cycle?
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A free market economy is driven by individual innovation and the notion that hard work and ingenuity will be rewarded by success. All businesses exist to make a profit. Therefore, in the free market system, a successful business makes a consistent profit in a field of competitors. The concept of competition is an important component of a free market system.
Competition in the marketplace provides the best possible product to the customer at the best price. When a new product is invented, it usually starts out at a high price, once it is in the market for a period of time, and other companies begin to copy it, the price goes down as new, similar products emerge. In a competitive market, the poor versions of the product or the overpriced will be pushed out of the market because consumers will reject them.
The free market system determines the winners and losers in each industry based on the demands of the customer, whether industrial, business customers, or consumers, people who buy for personal use.
In a free market system, the entrepreneur takes a great risk to launch a business, putting up capital, with the hope that the product or service will succeed. If the risk is considered a disadvantage, when the business succeeds, the profit and control of the businesses future is determined by the owner, not the government.
Ask your product life cycle question separately it is too detailed to include here.
In reality there are no perfect free market economies. Even in countries like USA considered to be champions of free market, there are many areas of government control. For example there are laws intended to check unfair trade practices. Also there are considerable restriction on what can be imported and how much quantities through the mechanism of import quotas and tariffs. Then there are provisions like anti dumping laws.
This proves that free economy has its advantages as well as limitations. The biggest advantage of free market economy is that it gives the people the power of choice. They have greater freedom to choose how they want to spend their income. Another major advantage is that it makes best use of individual entrepreneurial abilities, which it also encourages.
Major problem is that to be most effective it needs some ideal environmental conditions like full, free and instantaneous availability of all relevant information to all buyers and sellers. It also requires complete freedom to manufacturers from one industry to another. Perfect conditions like these are possible only in theory.
Lack of these ideal condition makes free market mechanism ineffective in many ways. Thus monopolies and oligopolies develop, that may act against the interest of the consumer. Also we cannot always take it for granted that what consumer want is in his or her best interest. For example, no reasonable person will say that drugs should be freely sold to people who want to buy it.
another major limitation of free market economy is that it has no mechanism to reduce the disparities between the haves and have nots. It just creates a system in which everyone ears as per his ability. Actually because of the imperfection in market mechanism, free economy tends to further increase the disparities between people.
- the market produces a wide variety of goods and services to meet the consumer's wants
- the free market responds quickly to people's wants
- the market system encourages the use of new and better methods and machines to produce goods and services
- factors of production will be employed if only it's profitable to do so
- the free market can fail to provide certain goods and services
- the free market may encourage the consumption of harmful goods
- the social effects of production may be ignored
- the market system allocates more goods and services to those consumers who have more money than others
Sources: Economics book, a complete course for IGCSE and O Level by Dan Moynihan & Brian Titley Endorsed by the University of Cambridge International Examinations
Businesses need a free market so there are no restrictions on the profits they can make. The idea behind a free market is that prices will regulate themselves. Supply and demand will reach the point of equilibrium where the most money will be made. However, what is best for the company is not necessarily what is best for the people. A free market puts the needs of companies above the needs of consumers.
The key feature of a free market economy is that market forces dictate what is produced, in what quantities, at what price, and for which consumers. Resources are privately owned by individuals and companies. Profit and return on investment are the main drivers of businesses.
History has shown that free market economies perform substantially better than government-run economies. They have proven to be more responsive to customer needs, and create a wider variety of products than alternative economic approaches. Intense competition pressures firms to produce ever-better goods and services at lower cost and more efficiently.
There are also disadvantages to a free market economy. Certain public goods such as roads, brudges and street lighting may not be produced because companies may not find it sufficiently profitable. Companies may produce goods that are in demand but, without regulation, would be harmful to the customers or society as a whole, e.g. pesticides. Finally, because businesses seek to maximize profits, they might not consider the potentially negative social impacts of their products, e.g. misuses of the Internet for illegal or illicit purposes.
1. A very high income mobility
2. A much higher GDP
3. More money spent on social programs
1.unprovision of merit goods like education,health,housing
2.non provisions of public goods
3. social injustice
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