AS A Level: Free Market Economy

• As has been said because resources are limited while needs and wants are unlimited
• Society faces an economic problem of how to allocate its scarce resources
• It has to answer three basic questions:
  • What to produce
  • How to produce and
  • For whom to produce?
• The task of coming up with solutions to these basic questions often falls upon the government of that particular society
• These questions can be answered using economic systems
• An economic system is also known as an economic order
• An economic system can, therefore, be defined as an organized way in which a state or nation allocates its resources and apportions goods and services in the national community
• Overtime three economic systems have evolved to become the most prominent
• Here we will examine one of them: The Free Market Economy

Characteristics/Features

• This system is a spawn of the capitalist system
• It is sometimes just known as a market economy
• Within a Free Market Economy:
• All the resources (factors of production) are owned by private individuals
• Profit is the main motive of all business i.e. businesses are driven mainly by their desire to maximise profits
• The government takes a laissez-faire attitude when it comes to managing businesses within the economy i.e. there is little or no government interference in business activities
• Producers are free to produce how much they want, for whomever they want
• Consumers are free to choose between different brands of the same product
• Prices are determined by the market mechanism of supply and demand
• Businesses are free to enter the market
• There are no countries with a free market economy but the economies of the United States and Japan are close

NB

• The advantages and disadvantages of the Free Market Economy can be found here

To access more topics go to the Advanced Level Business Studies/ Business Enterprise Skills page

To access more topics go to the Cambridge AS A Level Business Studies page