Free Market Definition Characteristics Examples Working

Free Market Definition

Individuals or private entities define parameters based on changing client preferences and market conditions in a pure market economy. Producers also have the freedom to trade contracts with one another by adopting strategies and encouraging voluntary exchanges in a given economic systemEconomic SystemThere are four prominent types of economic systems in the world based on their characteristics. It includes traditional economy, command economy, market economy and mixed economy. read more at a given time. The minimal to no government interference forces businesses to provide quality offerings in response to consumer demand.

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Key Takeaways

A free market is an economic system in which private business owners get complete control over production, allocation, consumption, pricing, labor supply, and the purchase and sale of products and services without any governmental interference.In a pure market arrangement, buyers and sellers engage in economic transactions of tangible or nontangible commodities and services as part of a voluntary agreement.In free market capitalism, each business owner decides what to make, sell, and buy and remains concerned with maximizing profits in whatever way feasible.Private business ownership, some degree of monopoly, fair play, customer-centric approach, supply-demand balance, innovation, co-operation, etc., are some of the self-regulated market economy features.

How Does Free Market Economy Work?

A free market system is one in which market forces determine demand and supply and set prices rather than government economic interventions. Furthermore, buyers and sellers engage in the exchange of tangible or nontangible commodities under a voluntary agreement. Participants in a self-regulated market decide market strategies and resources to meet the expectations of their target marketTarget MarketA target market consists of different groups of individuals, households, and organizations towards which a company aims to offer its products and services.read more.

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Private enterprises try different strategies to stay in the market and dominate it, from enhancing product quality to lowering pricing. As a result, they draw an increasing number of customers to their brands, resulting in a monopoly. Businesses in a pure market arrangement only focus on maximizing profits in any way possible. However, to achieve their goal, they lower costs and offer significant discounts.

Besides minimal to no taxes, tariffs, and quality regulations, there are no conditioned or forced transactions. However, much like a regulated market, a free market economy is not necessarily free from government regulations. For example, different countries levyLevyA levy is a lawful process where the debtor’s property is seized when the debtor cannot pay the outstanding debts. It is different from liens, as a lien is only a claim against a property, whereas a levy is an actual property takeover to fulfill the obligation.read more import duties and impose legal restrictions on the consumption of certain products.

The unrestricted competition characterizes a free market. But its inclination to keep product prices below the cost of production prevents sellers from generating excessive profits. Voluntary economic activity continues until central authorities control it.

Free Market Scenario

Consider the following scenario to understand how the free market works:

Andrew decided to convert his home into a shop and sell mechanical tools in his neighborhood. As he looked forward to targeting the locals, he kept the production low. To his surprise, his tools were well received in the community.

The positive response encouraged him to provide his tools across the city. There, he discovered many competitors doing exceptionally well. As a result, he concentrated on growing his customer base first by offering discounts. He, thus, removed some of his competitors from the market.

Andrew, who was wealthy enough by the time, bought out the remaining competitors. He established his monopolyMonopolyMonopoly is the “one-&-only” seller of a good or service in the market & it faces no competition from any other entity. Generally, it is controlled or monitored by the Government to safeguard the customers’ interests. read more, which extended over the country in a few years. Andrew started building his public image simultaneously by donating to charities. He also cultivated relationships with government officials, whom he could use for favors whenever an outside brand attempted to import similar products.

Despite his efforts, human rights activists found out that he was paying below-average wages to his workers. Andrew was also found taking advantage of government employees for his gain. These allegations drove him to the court of law, where he was found guilty and given the option of serving 15 years in prison or paying a fine of $50 million. He was set free after paying the fine.

Free Market vs Capitalism

In a pure market economy, privately-owned businesses do not share their profits with anybody else. As there is essentially no government interference, these business owners became sole controllers of their brands and are free to define their sales guidelines. These self-regulated markets commonly exist in countries that support capitalism and individual and private property rights.

CapitalismCapitalismCapitalism is an economic system consisting of businesses, resources, capital goods, and labour. Private entities own it, and the income is derived by the level of production of these factors. Because of the private hands, these entities can be operated efficiently and maximize their production activity also.read more is typically a profit-driven economic system based on private ownership of production assets. Its critical components include capital accumulationCapital AccumulationCapital Accumulation is the increase in the value of an investment or a financial asset, whether it is tangible or intangible. Interest, royalties, rent, dividend, capital gains are the most common examples of capital accumulation.read more, pricing, competitive markets, property rights, wage labor, and voluntary exchange. While the competition determines product prices and distribution, private business owners make investment-related decisions.

Given the definition above, it is clear that capitalism is nothing more than an example of a free market. There is a close association between the free market and capitalism. A market in which a single business owner decides what to create, sell, and buy may be considered free market capitalism.

Andrew’s decision to lower pricing to attract more buyers had a direct impact on worker wages. Also, it portrays how a private company exploited workers for its benefit. It is what free market capitalism is all about.

Examples

Let us take a look at a couple of free market economy examples:

Example #1

Sarah opened a cafe with no competitors and managed to garner interest from people around. The positive response encouraged her to open multiple branches across the city, making her a wealthier businessperson.

Sam, who observed the lack of places to hang out in the neighborhood, opened another café. As a result, it divided the clients and harmed Sarah’s sales results for that branch. To ensure that she is the only brand in the area, Sarah offered Sam a fair price for the brand. She also suggested him trying his luck downtown, which might work.

Her competition agreed, and Sam sold his brand to Sarah, who continued to operate it under his name. With this voluntary exchange, she was able to keep her clients while also acquiring Sam’s and profiting from both brands.

Example #2

It gradually began to offer other services, such as internet streaming, warehouses and logistics, and so on. The brand, thus, thrived in a free market and became a self-sufficient service provider around the globe.

Characteristics

Here are the characteristics of a free market that can easily be derived based on the explanation above:

A privately owned free market system has complete control over the production, allocation, consumption, labor supply, and the purchase and sale of goods and services.Financial institutionsFinancial InstitutionsFinancial institutions refer to those organizations which provide business services and products related to financial or monetary transactions to their clients. Some of these are banks, NBFCs, investment companies, brokerage firms, insurance companies and trust corporations. read more provide investment services to businesses in a pure market economy and assist them in locating and persuading their target markets and exchanging goods and services.It enables every individual or company to contribute to maintaining a balance between demand and supply. They also have the option of producing or consuming a desired quantity of products.It encourages private business owners to innovate to improve product quality and maintain market positions by focusing on the needs of consumers.Marketing characteristics such as fairness, self-control, co-operation, and competitiveness, make a self-regulated economy efficient.It is a consumer-centric market since the business owner’s decisions solely focus on ensuring that customers buy the products. However, consumer behavior influences product prices.