Comparative Analysis of Free Market Economy and Mixed Economy - Essay Example

?According to Pryor (2006), “An economic system comprises the configuration of s and organisations that specify property relations within a given society or that channel and influence the distribution of goods and services.” Simply put, this is an organized way of distributing resources in a particular state by the government. The government imposes formal laws about how the resources are supposed to be distributed among the citizens. In some cases, informal constraints are also used to guide the way resources are distributed in a particular area. There are four different types of economic systems namely: traditional, free market, planned and mixed economy. In a traditional economic system, there is no control and everyone can produce goods for themselves. The countries which follow this economic system have low GDP and they have high government regulation of business. A good example of a country that uses this economic system is Bangladesh (Pryor, 2006). On the other hand, a planned economic system is the one where all economic activities are planned by the government of the day. The government has the overall say in how businesses should operate and a good example of a country that uses such system is Venezuela. Free market is another economic system that is mainly determined by the price mechanism. Individuals can produce for themselves in order to gain a profit and they can also determine the price of their commodities. Most developed countries such as the US and UK use free market economic systems and resources are allocated on the basis of price. Lastly, a mixed economic system is a combination of both panned and free market economic systems. This system is found in many developing countries as well as emerging economies like South Africa. The price mechanism and government control shape the distribution system of the resources in the country. A free market economy is defined as “a market without any regulation. In other cases it means markets in which prices are free to reflect supply and demand. Sometimes it means competitive markets free of monopoly or concentration,” (Roberts, 2011). In a free market economy system, individuals are encouraged to produce and make gains for themselves and the economic system is driven by profit motives. It can also be seen that price mechanism determines the allocation of resources. For instance, the law of demand and supply comes into play. Basically, in a free market economy, the quantity of products offered in the market is mainly determined by the amount of price the consumers are willing to pay. Kotler and Armstrong (2004) state that the price people are willing to pay for a certain commodity correlates with the quantity of goods supplied. In economics, the law of demand and supply states that the price of the product shapes the quantity of goods that can be produced at a particular period. This law goes on to state that the higher the price, the higher the goods the producers are willing to supply (Benassy, 1988). High price means high supply of products and this entails that high profits are likely to be generated. On the other hand, a mixed economy is a combination of a free market and planned economies. A mixed economy is regulated and its performance is mainly determined by the economic policies promulgated and implemented by the government. To a certain extent, it can be seen that a free market economy is effective compared to a mixed economy. According to Pryor (2006), countries with a business-oriented or free market economic system have a significantly higher rate of economic growth. The main reason for this is that they can generate more revenue from free trade taking place. Unlike in a regulated economy, a free market economic system is liberal and the flow of money is not restricted. In a free market economy, the consumers have a variety of choice of goods offered since the manufacturers of these commodities are mainly concerned with satisfying the needs of the customers. As long as the consumers are willing to pay the price, the manufacturers and suppliers of goods can supply them in large quantities. The money generated from this economic system can be channeled for other developmental purposes and it also helps to improve the welfare of the people. The other advantage of a free market economy is that quality and innovation are promoted. The primary goal of this economic system is to generate profits. Therefore, effort is made to ensure that the quality of good offered is high so that many buyers can buy the products. However, a free market economic system has its own limitations. Roberts (2011) posits to the effect that the ideological position of the free market economy “overlooks that regulation can increase economic efficiency and that without regulation external costs can offset the value of production.” He goes on to say that the financial crisis recently experienced in the US and the world at large is a good example of “what the absence of regulation can produce.” As long as the financial system remains unregulated, such problems are likely to recur and this is one of the major disadvantages of a free market economic system. The other problem of this economic system is that large financial corporations cannot be held accountable for their actions. In the event that they fail, the impact on the whole economy and the whole country will be plunged into a serious crisis. From a social point of view, it can be seen that the distribution of wealth is unequal. Only people who have access to capital to invest in different businesses can enjoy luxurious life while those without would live in poor conditions. The inequality in the distribution of wealth can create a gap between the rich and the poor and this is not an indicator of a balanced economy. References Benassy, JP 1988, ‘The Objective Demand Curve in General Equilibrium with Price Makers,’ The Economic Journal, Vol. 98, No. 390, Supplement: Conference Papers. (1988), pp. 37-49, viewed 20 November, 2013, Kotler, P & Armstrong G 2004, Principles of Marketing, Pearson Education International, NJ. Pryor, FL 2006, “Economic Systems of Developing Nations,” Comparative Economic Studies, 48, 77–99. doi:10.1057/palgrave.ces.8100072. Viewed 21 November 2013, from: . Roberts, PC 2011, “The Case for Regulation. The Failure of Free Market Economics,” The International economy. Viewed 21 November 2013, from: . Read More