Free market or Capitalist
economic systems are the system in which the market forces (demand and
supply) determine the resource allocation. This is also known as lassez-faire system.
Features of free market or
Capitalist economic system 1) Existence
of Private property: Individuals have the right to own, control
and dispose of private property. 2) Freedom of choice: The consumer is free to consume any commodity
of his desire. A producer is also free to produce any commodity that would
maximise his profit. 3) Self-interest:
Individual behaviour is guided by self-interest. 4) Market mechanism: Demand for and supply of a commodity determines
the price. This system allocates the economic resources among different
productive resources. 5) Minimum
government control: Government functions are limited to such
minimum as defence and Keeping law and order.
Advantages of market
economic system
Market economic systems have many advantages in
comparison with command economies. These include:
Consumer sovereignty: Resources
are allocated towards the satisfaction of the consumer; firms can only survive
if they consistently satisfy consumer demand. The more they satisfy the
consumer, the greater their profits.
Choice: Firms may
compete with each by offering different products, providing consumers with a
wide choice.
Price and non-price
competition: Competition keeps prices down and increases the
quality of goods and services.
Automatic adjustment of
price mechanism: The price mechanism works automatically, as prices
convey information about relative scarcity without the need for a government.
Rationing indicator: Greater
the scarcity, the higher the price, and the more it is conserved. So Prices act
as an indicator for rationing scarce resources.
Utility and profit: The price
mechanism allocates resources towards products that provide the highest utility
and the greatest profit, hence benefiting consumers and producers together.
Efficiency: All
participants (factors of production) have incentives (in the form of higher
income) for better efficiency. The production of goods is efficient because
firms need to keep costs as low as possible. Hence there will be optimum
utilisation of resources.
Innovation: Firms usually
need to innovate to retain consumer loyalty and win new customers from rivals.
The disadvantages of market
economic systems
Market systems also have disadvantages, including:
Under-valuing non-traded
services: Some goods and services cannot easily be traded in
markets, such as healthcare, education, and defence. With these goods, the
value attached by market forces is unlikely to be the 'real' value of the
service.
Missing markets: There is the
problem of missing markets, which arises when consumers have a need or a want,
but markets do not exists, as in the case of public goods.
Incomplete markets: It arises
when firms only supply a part of the whole market demand, such as the case of
merit goods.
Externalities: Some goods
and services generate costs and benefits that are not taken account by
consumers and producers.
Lack of purchasing power: Some
consumers have no purchasing power, such as the disabled, because they are not
able to work in the labour market. This system ignores the welfare of
these groups. Without work, they cannot derive an income, and are unable
to purchase goods and services. This will lead to inequality of income
and wealth and cause economic in stability.
Wasteful competition: The domination
of competition cause huge waste of human and capital resources.