Civil Engineering Reference
In-Depth Information
FREE MARKET MODEL
The free market system is typified by limited government involvement in the
economy, coupled with private ownership of the means of production. Individuals
pursue their own self-interest without government constraints: the system is
decentralised.
An important feature of this system is
free enterprise
. This exists when private
individuals are allowed to obtain resources, to organise those resources and to sell
the resulting product in any way they choose. Neither the government nor other
producers can put up obstacles or restrictions to block those in business from
seeking profit by purchasing inputs and selling outputs.
Additionally, all members of the economy are free to choose what to do.
Workers may enter any line of work for which they are qualified and consumers
may buy the goods and services that they feel are best for them. The ultimate
voter in a free market, capitalist system is the consumer, who votes with pounds
and decides which product 'candidates' will survive. Economists refer to this as
consumer sovereignty
as the final purchaser of products and services determines
what is produced - and, therefore, 'rules' the market.
Another central feature of the free market economy is the
price mechanism
.
Prices are used to signal the value of individual resources, acting as a kind of
guidepost which resource owners (producers and consumers) refer to when they
Figure 2.2
The price mechanism at work
Price changes co-ordinate the decision-making processes of consumers and producers.
When supply exceeds demand, the price of a product will need to fall for the market to
clear. Conversely if demand exceeds supply, the price of the product will rise. For the
price mechanism to function in all markets, it is important that resources are owned
privately and can move freely between competing uses.
Supply
Exceeds
Demand
Price
Falls
The
Price Is
Right
Supply
Equals
Demand
Demand
Exceeds
Supply
Price
Rises
