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Explain In Detail The Principles Underlying The Free Market Economy

881 words - 4 pages

The Free Market Economy also referred as Capitalism and Laissez- Faire, is a type of economic system, mostly dominant in the Western world, where, the production and distribution of goods and services are determined by invisible market forces of demand and supply. Thus, due to consumers and businesses deciding what they will purchase and produce, the allocation of resources and price will be determined by demand and supply rather than government intervention. In other words, producers decide what to produce, how much to produce, or what to pay employees, and not the government.

It would certainly make sense to point out here how the price mechanism works and dictates the prices in the ...view middle of the document...

For instance, when the sensational ipod music player was launched by Apple Company, the price was very high and only a small percentage of the population could afford it. Luckily, gradually with competition, the price came down.

Secondly, as previously mentioned, competition leads to innovativeness and value for money. But if closely considered, it is a waste of resources as producers spend massively on advertisements and promotions to compete with other producers, rather than investing to produce better quality products, thus giving customers value for money. A good example is the market for electronic items, where consumers benefit from cheap prices, due to competition but very poor quality products with some producers offering very poor after sales service which can put a customer in situation where they have to pay high charges to repair the product, in case it goes faulty.

Problems can also arise in the market economy if there are only a few producers for certain goods and services, where prices are then fixed by the producers associations rather than by price mechanism. This way of price fixing is against the anti-monopoly rules but in some sectors of the economy it can be difficult to prove that it exists, e.g in the UK care sector.

In a free market economy, it can be very difficult to minimize social problems like divorce, illegal trafficking, pollution, etc. This is because of no government intervention and less responsibility on the part of producers towards social and welfare benefits of the whole population. In addition to, it may be equally very difficult under this type of economy to provide certain services...

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