What are the advantages and disadvantages of a free-market economy? 

The advantage of a free market economy is that when it works, it can both reward and perpetuate innovation and hard work. A disadvantage of free market economies is that they are inherently more risky and thus tend to favor those who start out with more capital and resources.

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A free market economy has two key advantages. First, it allows for individuals to innovate. Individuals have the freedom to create new ideas, new products, and new services to sell for profit. They are not required to only produce what the government tells them to produce. Due to this freedom, competition is created, forcing companies to create new products and features. A clear example of this is the cell phone market. New phones come out each year, as individuals create new ideas and new features for their consumers.

The second major advantage is that customers drive decisions. If a customers wants a certain product or feature, the producer must meet their needs in order to survive. This ultimately drives the price, as customers determine the price of products.

However, disadvantages are created from some of the advantages. Profit motive drives businesses, but can create dangers. Poor working conditions and unethical decisions can be made as entrepreneurs seek higher profits. Secondly, free markets can lead to market crashes as we saw in the great depression and the economic downturn in the early 2000's. Unemployment can lead to devastation of families.

These advantages lead to economic growth and expansion during the business cycle. However, during times of crashes and downturns, government regulation usually occurs to spur expansion again.

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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.

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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.  


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