Cambridge AS A Level Business Studies/ ZIMSEC Advanced Level Business Studies/ Business Enterprise Skills Notes: Free Market Economy: Advantages and disadvantages 

  • Having examined the features of a Free Market Economy
  • We will now examine the advantages and disadvantages of this economic system
  • While it might not be said explicitly these benefits contrast with those of a command economy
  • For the most part, the advantages of a free market economy are the disadvantages of the command economy
  • The converse is also true as the disadvantages of the free market system are often the advantage of the command economy

Advantages

  • A free market economy responds quickly to the needs are wants of customers
  • There is no bureaucracy as opposed to command economies where the government has to consult widely before making a policy change
  • A wide variety of products gives an opportunity for people to choose from
  • There is an efficient/optimum allocation and use of resources
  • Profit is a pretty strong motive that will inspire entrepreneurs to establish more businesses
  • Businesses are free to innovate
  • Business operations are informed by consumer desires i.e. there is consumer sovereignty

Disadvantages

  • Some goods and services may not be produced for example merit and public goods
  • Unemployment may result since only those with skills that are in demand are actively employed
  • Social costs such as pollution can be ignored
  • There is duplication of resources, for example, mobile network operations having base stations in the same area even if one would suffice
  • Ultimately result in an unequal distribution of wealth
  • Can lead to monopolies which might dominate the market, crush other businesses (their competitors usually) and eventually exploit consumers/customers
  • There is not much incentive to act ethically at times

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