Saturday, 11 March 2017

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Free Market Economy | Notes, Definition, Examples, Advantages & Disadvantages



As we have discussed earlier, a free economy or a market economy, is such a system in which people of the country takes major business relating decisions. Such types of economy is consumer- based i.e. consumers’ takes major decisions regarding resources of the country. Here in this article we will be discussing about Free Market Economy.its definition, exmaples, some advantages and disadvantages.

Well, like I said earlier, Free Market Economy is a consumer-based economics model. Also the businessmen plays a crucial role in determining the use of factors of production i.e. land, labor, capital etc. Unlike, mixed economy, it’s the businessmen who decides how the business shall run and not the government of the country. Also, under free economy, individuals have complete rights to acquire property. Here, property rights means right to determine the use of resources whether it’s a personal resource or a public resource.

Role of Government is Free Market Economy

Though, Free Market Economy, itself means a market where goods and services can be exchanged freely. In such market, there is no regulation of government. The buyers and sellers negotiate at their own terms and conduct trade. Practically speaking, in free market economy, prices of goods and services is decided by the market forces, i.e. demand & supply. Such type of economy, supports private ownership of enterprises and it leads to increase in competition. Markets in free economy are highly competitive, as every business enterprise rushes to capture large market share and to achieve this, they spend heavily on advertisements, publicise their products and uses various methods to win an edge over their competitors. Stock market is the ideal form of free market, where prices of goods and services is determined by the forces of demand and supply.

Free Market Economy Examples | Demand and Supply Relationship Explained

With demand and supply we mean, there is a relationship between demand & supply which determines the prices of products. The relationship of demand, supply and price can be understood as follows-
For example, the demand of onions in market has increased, to meet such increasing demand, producers produced and supplied required quantity in the market. As a result, since demands of consumers in conveniently met, prices of onions won’t rise & will remain stable!

On the other hand, let’s suppose, the demands of onions has increased drastically, but, producers aren’t supplying onions in required quantity, may be due to less production or holding stock to earn when price is maximum. In such case, when demand is high but supply is low, then, the available amount of onions in market will be sold at a very high rate.

This is how goods and services are traded in free economy. Here, we conclude, that in free economy, market forces determines the price of the commodity. Also, free economy leads to increased competition. We have read earlier, that since , government does not regulates prices of products in a free economy, private players using market forces of demand and supply tries to stabilise the prices of their product, so that prices neither goes too high nor too low!

Why is Free Market Economy so Competetive? 

Due to less government intervention, free economy faces extreme competition. From big businessmen to small owners, they need to keep a watch over competitors’ prices to ensure their survival in the market. Business owners designs various marketing strategies to promote their product, to differentiate their products from the similar competitive firms and to capture large market share. For this, they design various strategies to prove themselves better than the rest!

Thirdly, free economy proves to be the profitable system of trade for private individuals. Government does not formulate any policies in relation to prices of goods and services. Businessmen, here, gets an added advantage. They can control prices of their products and earn greater profits as compared to firms operating under other forms of economies. Since, the entire game is conducted by consumers, therefore, businesses tries to produce high quality goods and earn maximum profits, also, consumers seeks to receive high quality products at affordable prices. This is how, businessmen in free economy gets an opportunity to earn well!!

Advantages and Disadvantages of Free Market Economy

And, the best outcome of such economy, is less government intervention. Who would like to get bounded by government policies? Free economy brings minimum government regulations in trade of goods and services. Their basic work is to stabilise economy by controlling the interest rates and providing customers with maximum satisfaction.

The advantages of free economy can be observed below:

1. Less or no government intervention.
2. Better opportunities to earn profits.
3. Production of consumer- based products.
4. Optimum use of resources, since, its private players controlling them.
5. Better quality products due to high competition.

With some advantages, there comes few disadvantages also. Free economy also suffers from few drawbacks which is illustrated as follows-

1. A free economy is an unstable form of economy. Since, government do not intervene, market becomes unstable leading to inflation, unemployment etc.
2. At times, free economy leads to unemployment. If goods are overproduced, then the businessmen need not to keep workers for further production, leading to unemployment
3. It leads to “economic disparity”. Economic disparity means the gap between the rich and poor grows wider. Wealthier keeps becoming wealthier and poor keeps going poorer.
4. Free economy does not reflects true market conditions. Since, prices of goods is purely dependent on consumers demand. Therefore, goods and services highly attracted by consumers would have higher costs as compared to other goods and services. For example : people would be willing to spend more on entertainment as compared to other services like education etc.
5. Products produced in free economy is more on the demand of consumers than their need.

Therefore, businesses with less demanded products suffer losses in down period.
Countries like Hong Kong, Singapore and Australia are world famous free economies of the world. In these countries, there is business flexibility and less government intervention. There is low tariffs i.e. taxes and few restrictions on investment and strong property rights.

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