Share
Explore BrainMass

free market

Our economy thrives on competition. Market forces will lead firms to produce the mix of goods most desired. Unforeseen events can be responded to in a rational manner. The constant struggle for profits will stimulate firms to cut costs. Note that technical efficiency results from attention to self-interest, not the public interest. However, in a market economy business must cater to the whims of consumer tastes or else go out of business.

Explain the importance of the following concepts:

1. Competition
2. Adequate information by all parties in the economy
3. The role of prices in a market economy

Solution Preview

A free market is an idealized market, where all economic decisions and actions by individuals regarding transfer of money, goods, and services are voluntary, and are therefore devoid of coercion and theft (some definitions of "coercion" are inclusive of "theft"). Colloquially and loosely, a free market economy is an economy where the market is relatively free, as in an economy overseen by a government that practices a laissez-faire, rather than either a mixed or statist economic policy. Within economics the more usual term is simply "the market", or "the market mechanism", to mean the allocation of production through supply and demand. Free markets are advocated by proponents of economic liberalism.

(Theory) If a government is present, its use of force in the marketplace is ideally limited to protecting the market participants from coercion, including protection of property rights and enforcement of contracts. The essence of a free market can be understood as a game in which the players compete according to a common set of rules that prevent coercion (including theft); the enforcement of these rules may be carried out by a neutral referee (government). Players in this game may have very different skills, knowledge, and wealth, which tends to conflict with social norms of fairness, so a free market may not accord with what some would consider a fair market. This conception of a market as a pure economic system based on freedom from coercion among market participants as well as from government is in fundamental contrast to a command economy.

The law of supply and demand predominates in the idealized free market, influencing prices toward an equilibrium that balances the demands for the products against the supplies. At these equilibrium prices, the market distributes the products to the purchasers according to each purchaser's use (or utility) for each product and within the relative limits of each buyer's purchasing power. The necessary components for the functioning of an idealized free market include the complete absence of artificial price pressures from taxes, subsidies, tariffs, or government regulation (other than protection from coercion and theft), and no government-granted monopolies (usually classified as coercive monopoly by free market advocates) like the United States Post Office, Amtrak, arguably patents, etc.
The distribution of purchasing power in an economy depends to a large extent on the labor and financial markets, but also on other factors such as family relationships, inheritance, gifts and so on. Many theories describing the operation of a free market focus primarily on the markets for consumer products, and their description of the labor market or financial markets tends to be more ...

Solution Summary

These concepts are defined:

1. Competition
2. Adequate information by all parties in the economy
3. The role of prices in a market economy

$2.19