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Free Market System Essay

2153 words - 9 pages

ECONOMICS FOR BUSINESS AND MANAGEMENT BC115008S

SID: 1118562

Q1:”People of the same trade seldom meet together even for merriment and diversion, but the conversation ends in a conspiracy against the public or in some contrivance to raise prices” (Adam Smith, 1776, Book 10, Ch. VIII).
Often, as Adam Smith noted above, the marketplace is influenced by the growth of monopolies, mergers, and cartel-type activities which often use their market power to the disadvantage of consumers.

a) Examine the arguments in favour of a free-market system of resource allocation

b) Explain how market failure can occur and suggest how the government in a country of your choice has sought to ...view middle of the document...

Equilibrium is a term relating to a 'state of rest', a situation where there is no tendency to change. In economics, equilibrium is an important concept. Equilibrium analysis enables us to look at what factors might bring about change and what the possible consequences of those changes might be.
For the purposes of this resource we are going to look at market equilibrium. Market equilibrium occurs where the amount consumers wish to purchase at a particular price is the same as the amount producers are willing to offer for sale at that price. It is the point at which there is no incentive for producers or consumers to change their behavior. Graphically, the equilibrium price and output are found where the demand curve intersects (crosses) the supply curve.

2) SUCCESS = PROFIT 2.2
All businesses exist to make a profit.  Therefore, in the free market system, a productive business makes a consistent profit in a field of competitors.  The idea of rivalry is an important component of a free market system. (Miranda, 2009).
In a free society, you do not succeed just by having the right ideas. You succeed by having the confidence to defend those ideas when they are under assault, and to see them through when the experts are counseling compromise (Murdoch, 2010, p.1).

3) RISK AND INNOVATION 2.3
  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. (Agravala, 2009)

4) PRIVATE PROPRIETY 2.4

According to Jefferson (1816) "The true foundation of republican government is the equal right of every citizen in his person and property and in their management."

* Recognized private property rights provide the legal certainty required for individuals to commit resources to ventures
* Clear property rights tend to make decision makers pay close attention to resource use and the discounted value of the future employment of scarce resources. if there were not private property rights, economic actors will tend to be blind in their decision making and not conserve resources over time. (Boettke, 2005)
* Property rights are the basis of exchange and the extension of ownership to capital goods forms the basis for the development of financial markets that are essential for economic growth and development. (Boettke, 2009)

* Secure private property rights are the basis for limited and civilized government.

3.0 MARKET FAILURE

Market failure occurs when there are too few markets, non-competitive behavior, or non-existence, leading to inefficient allocations (Ledyard, 2008).

When market failure occurs, it means that the system is not Pareto efficient.
Pareto efficiency is a condition in which all available...

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