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Discuss the free market economy and state the advantages and disadvantages of the economic system

Discuss the free market economy and state the advantages and disadvantages of the economic system

Answers

Felix
(b) FREE MARKET/CAPITALISM
In a free market economy (i.e. a capitalist economy) the government lays little role in economic activities. There is high freedom for individuals to own factors of production. The private sector provides answers to the fundamental economic questions. There is consumer sovereignty and the maximization of profit is the main goal of owners of factors of production. Price is determined mainly by the workings of the forces of demand and supply. In this economic system entrepreneurs adopt only the economically most efficient methods of production and goods will be produce where labour is the cheapest.
Advantages:
Producers and consumers of goods and services have choices. Producers are free to produce what the consumers demand and the consumers are also free to spend their money as they see it fit.
2. The economic decision of what to produce is made determines by the forces of demand and supply. Hence, there is greater participation in the decision-making process.
3. Prices of goods and services are determined by the price mechanism (workings of forces of demand and supply).
4. The government does not interfere in economic activities in any way.
5. Resources are efficiently used, since they are allocated to production areas that are profitable.
6. There is high level of competition among business firms. This improves quality of goods and services produced lower prices and encourage the use of technology and innovation.
Disadvantages:
1. It limits competition among firms. A few giant firms may dominate an industry. These firms may charge high prices and make large profits. Consumers face oppression and cheating. These firms, rather than seeking to satisfy or meet the wishes of consumers may result to advertisement as way of persuading consumers.
2. Absence of competition and abnormal profit may lead to inefficiency of firms.
3. The free-market economic system brings about concentration of wealth in the hands of few individuals. Power, property and resources may be unequally distributed. Those who have power, property and resources will gain at the expense of those without.35
4. The activities of some firms have for reaching effects. For example, production activities of some firms may lead to environmental pollution.
5. A free-market economy may bring about macroeconomic instability. It may lead to economic recession and inflation.
Anganifelix answered the question on December 8, 2018 at 11:59

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