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Economic Models: The Free Market and The State Owned System - Case Study Example

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This paper "Economic Models: The Free Market and The State Owned System" discusses different models that are based on a collection of assumptions, express equations relating different variables and infer results from them about economic behavior and performance…
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Economic Models: The Free Market and The State Owned System
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Download file to see previous pages The free market concept is mainly a theoretical concept as every country, even capitalist ones place some restrictions on the ownership and exchange of commodities (Free market economy). Therefore, the term free-market economy primarily means a system where the buyers and sellers are solely responsible for the choices they make. It gives the buyers and sellers the power to do business without being afraid of any regulations and intervention by the state. Hence, a free market gives the absolute power to prices to determine the allocation and distribution of goods and services (Free Market Economy). The pricing mechanism is in turn, driven by the forces of demand and supply of goods and services. Demand and supply of goods and services provide an honest estimate of the price of the goods or services because a product or service can only be sold if there is a buyer who wants it. The buyer will only buy the goods or services if it fulfills a previously unfulfilled need. Changes in the demand and supply will bring about a change in the price and as a standard rule, it is stated that an increase in demand for a product will cause an increase in price while an increase in the supply of the product will cause a decrease in the price. As a result, if goods are services are to sold there needs to be a price at which the deal can be signed off and that price is determined by the number of buyers and sellers of the respective commodities or services.

The role of the government in the free market economy is limited to controlling the law and order and to ensure that a fair price is charged by the sellers. Thus, the role of the government is to administer the prices of different commodities and services and check that sellers charge prices that are reflected by the rules of demand and supply. The important point that needs to be noted is that the role of the government is to only administer prices it cannot in any way affect the prices of commodities.  ...Download file to see next pagesRead More
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