Free Market System and Arguments in its Favour - Assignment Example

In the fee market system, prices are also set by supply and demand, and there is no government intervention. Resources are allocated based on demand of those resources and their supply. The term ‘free market’ refers to the freedom from governmental control and regulations. Market forces set regulation themselves through supply and demand. Arguments given in favour of free market system will be discussed in this section. It is important to understand the concept of supply and demand if we want to understand free market system of resource allocation.

Supply refers to the quantity of product that can be supplied by firms. Demand refers to the quantity of product demanded by the consumers. The place where demand and supply curves intersect is called equilibrium price. In free market system resources are allocated through supply demand curves only with no intervention of government. Source: www.learngoldcoins.com Proponents of free market system argue that markets balance or correct themselves and there is no need for any government intervention.

According to Adman Smith, an invisible hand balances supply and demand forces and maintains equilibrium (Smith, 1776, Book IV). Invisible hand refers to the ability of the market to balance itself without government intervention, and this is the essence of free market system of resource allocation. . If a business is profitable other firms will enter into that business driving the profits down and therefore monopolies cannot exist in a free market system. This is one of the biggest advantages of a free market system of resource allocation.

Absence of monopolies and cartels is the first argument given in favour of free market system. Efficiency is another advantage of free market system. When price setting is left to market forces, firms operate efficiently using all their resources to produce at lowest possible prices. Increased efficiency is the direct outcome of competition and free market system promotes competition. All firms are free to enter into any business they want and consumers also have a wide range of products and services to go to.

There is no government help or intervention therefore firms have to work out a production system that maximizes output and lower costs. This is how free market system of resource allocation promotes efficiency. Another advantage of free market system is that consumers have access to a variety of products and services. Whenever there is a demand it is met with supply and this allows consumers to get a wide range of products and services. When production and investment decisions are made by market forces instead of government, resource allocation is done in such a way that benefits the whole society.

People generally make economic decisions that are in their interests and therefore through free market system of resource allocation an equitable system is created which benefits the overall benefit of the society. It is argued that people, and not government, know what is in their best interests and therefore resources should be allocated through free market system. In free