In a free market the laws and forces of supply and demand are free from any intervention by a governmentby a price-setting monopoly, or by other authority. Proponents of the concept of free market contrast it with a regulated marketin which a government intervenes in supply and demand through various methods — such as tariffs — used to restrict trade and to protect the local economy. In an idealized free-market economyprices for goods and services are set freely by the forces of supply and demand and are allowed to reach their point of equilibrium without intervention by government policy. Scholars contrast the concept of a free market with the concept of a coordinated market in fields of study such as political economynew institutional economicseconomic sociologyand political science.
Consumers and businesses form a relationship that ultimately determines the cost of a good or service and the health of the market. If demand is up and supply can adequately satisfy it, then the market is strong. Lots of people have money to buy new things, more new things are produced and sold, and wealth is generated.
This wealth is then dispersed throughout the society, all strata of which ultimately benefit: Companies require labor in boom times, thus increasing employment; taxes paid on that wealth end up funding government social programs for the poor.
If a market hits a bump in the road -- for example, through a stock market crash or a housing slump -- demand decreases.
Less wealth is generated, employment decreases and ultimately, the poorer classes suffer most. This is the stickiest aspect of capitalism; it's highly Darwinian in nature.
Companies unfit to operate and inherently taxing to the capitalist system won't weather an economic downturn. Those that can make it through a recession -- which is simply a decline in economic progress -- have ultimately proven that they're an asset to the economy. This is how the market corrects itself.
A recession strips away bad assets, whether in the form of a poorly designed security or a badly managed business.
Those remaining should be strong enough to rebuild the market. After a recession ends, the process will begin again. So it's natural that capitalism fosters competition. In "The Wealth of Nations," economist Adam Smith, regarded as the father of capitalist theory, laid out how capitalism inherently protects members of a society.
When supply outpaces demand, companies compete to offer the lowest price to consumers, who benefit from the competition [source: Companies seek to achieve monopolies -- sole control of a good or service, wherein prices are set by the company rather than market demands.
Wages are set as low as laborers will tolerate. Steps to ensure consumer protections such as safety and quality should be taken only insofar as they attract a customer base.
Free enterprise economies allow people to be creative and productive on their own volition, unlike other market economies, such as a socialist or communist economies. Identification The components of a free enterprise system include households, businesses, markets and the government. The Role of Government in a Free Market Economy. The U.S. has a “Free Market Economy.” Put simply, a free market economy is one in which decisions regarding investment, production and distribution are based on supply and demand. A market economy is an economic system in which individuals own most of the resources - land, labor, and capital - and control their use through voluntary decisions made in the marketplace. It is a system in which the government plays a small role.
Capitalism itself is often criticized as an amoral system, since it prizes the self above others [source: Smith pointed to built-in checks and balances of the capitalist system that are meant to prevent abuse. For example, higher wages mean a laborer can afford to properly feed himself or herself.
In Smith's words, "[a] plentiful subsistence increases the bodily strength of the laborer" [source: So a company that pays more than average wages will create a stronger workforce and increase its productivity, giving it a competitive edge in the marketplace.
When Smith's capitalist theory was put into practice in the nascent United States, these natural checks and balances didn't always emerge.
As a result, the federal government has enacted forced checks and balances to counteract the weight produced by unfettered competition. What has emerged is a hybridized version of a free market.At its most basic, a free market economy is one that is governed strictly by the forces of supply and demand with no governmental influence.
In practice, however, nearly all legal market economies must contend with some form of regulation. Economists describe a market economy as one where goods.
Jun 27, · Monopolistic competition is a type of market system combining elements of a monopoly and perfect competition. Like a perfectly competitive market system, there are numerous competitors in the market.
Insufficiently regulated free-market capitalism prompted the financial crisis of and the Great Recession, yet a political system dominated by wealthy special interests appears unable to take the necessary action to prevent the nightmare from happening again.
Definition of free market economy: an economic system where the government does not interfere in business activity in any way Dictionary Term of the Day Articles Subjects. A true free market system occurs when certain items are produced for consumption by the general population.
The more people want a certain item, the more of those items are produced. And the state, not the free market, served as midwife to the new world order.
— heather souvaine horn, The New Republic, "A System in Denial," 16 Apr.