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Introduction to Economics Assignment - Essay Example

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Name: Economics Assignment Module Semester 1350 Words 1) The free-market economy is an economic system which works and operates automatically. The mechanism used in this is called price-mechanism. The movement in prices under this system leads to efficient allocation of resources and also helps the producers decide which goods these should produce…
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Download file to see previous pages Free Market Economy is also characterized by the rights of individuals to buy and hold private property (Lipsey & Chrystal 2003). This characteristic is an incentive for both buyers and producers. It allows both buyers and producers to make bold and brave decisions. Since producer knows that he can own land, capital and other factors of production, he invests money into the system. Buyers also know that they can acquire goods, property or other thing of value now and can either consume it or store it for future consumptions. This moves the wheels of the economy and leads to equilibrium quantity demand and quantity supplied in the market. It also leads to price adjustments in the economy at a point where the motives of the buyers meets the motives of the sellers or producers. This is also called market creation or market searching. Market searching is the process when the market is trying to adopt or settle at the equilibrium price. Eventually market settles down at equilibrium because in over priced market supply is greater than demand which eventually leads to price going down. If the market is under priced demand is going to be higher than supply and this will result in price hike and eventually equilibrium will be reached. Free Market Economies encourage the process of market searching through market forces working without any intervention from government or other control factors. (Brue & McConnell 2006) Adam Smith also pointed out an interesting phenomenon in the system. He laid the foundations for the concept of “Invisible Hand” in the free market economy. He was referring to the fact that everything changes in response to the movement in prices. In essence, he was telling the world that in order to achieve their own motives, buyers and producers end up doing good for the system. This interesting fact can be explained in the following example. When a person earns income in this system, he spends it on his necessities, needs and wants. The money spent in the economy changes hand and transfers from the hand of the person spending the money to the producers of goods and services wanted by that person. This encourages producers of these goods and services to employ more resources and produce more goods and services. This leads to employment generation in the economy and when people are employed they tend to invest and save more. This leads to further employment generation and the cycle continues. The focus in this example is on the trickledown effect in the Free Market Economy. Many countries where the socialism dominated previously have realized the importance of Free Market Economic System and are opening up themselves for more private investment and encouraging the development of private entrepreneurs that will provide the impetus for high economic growth rates. The debate here is not about how good or bad the free market system, but it is more about why aren’t countries adopting the model of free market economy in its perfect sense. Even USA is not a totally Free Market Economy. Government controls and regulates the economy in the United States of America as well. The reason for this is simple. Extremism in any system is bad. If a system is totally dominated by private sector without any government regulation of the economy, then there are chances that private businesses might exploit the resources, consumers and the environment. This would lead ...Download file to see next pagesRead More
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