Free market in the economic system is known as one of the basic principles and means a market that operates under conditions without price and product restrictions. In this article, a full review of its features, advantages and disadvantages will be discussed. Also, to read more articles about business organization, you can refer to the articles page.
What is a Free Market?
A free market is a market in which economic activities are carried out without any legal or governmental restrictions. Here, suppliers and buyers interact and negotiate based on need and demand, and prices are naturally formed based on the interaction of supply and demand.
In a free market, government and other legal authorities are minimized, allowing market interactions to be automated for the production and distribution of goods and services. These markets are mainly located in free economies and are domestic and international markets.
Examples of open markets include the stock market, the Forex market, the global oil market, the agricultural commodity market, the gold and silver market, and the international trade market. In these markets, prices are determined independently by buyers and sellers, and the government and other legal authorities play a lesser role in determining prices and market interactions.
Therefore, a free market means a market that operates under conditions where there are no restrictions on product pricing and determination. In this market, the laws of demand and supply affect the price determination, and the active market has reached a point where it determines the optimal price for each product and service.
Features of the Open Market
The open market has its own characteristics that can distinguish it from other markets. Some of its features are:
1.No Price Limit
In this market, pricing happens completely freely and based on the interaction of demand and supply.
Due to easy and transparent communication, this market offers a greater variety of products and services that can contribute to economic growth.
In the open market, participants are completely free to choose goods or services and set prices.
Competition between companies in the free market is encouraged and causes the quality of products and services to improve and prices to be lowered.
5.Non-Interference by the Government
In a open market, government and other legal authorities are minimized, allowing market interactions to be automated for the production and distribution of goods and services.
6.Supply and Demand
In the free market, suppliers and buyers interact and negotiate based on demand and need, and prices are naturally formed based on the interaction of supply and demand.
In a free market, communication between suppliers and buyers is easy and there are no restrictions on business transactions.
The open market is more transparent due to the absence of government interference and the existence of mutual demand and supply, and prices are determined transparently.
In a free market, healthy competition between producers and sellers is one of the positive results of the free market. Competition makes the quality of products to improve and the prices to be as low as possible.
10. Time Value
In a open market , time value is very important and faster decisions are made through market interactions.
Therefore, its features include things like transparency, many participants, healthy competition, no stopping in the transaction, the power to determine the price by supply and demand, non-interference of the government and maintaining private property rights. In general, it should include conditions where the price for buyers and sellers is equal to the cost of producing the product or service, and only natural changes in supply and demand and the cost of production should affect the price.
The free market is usually considered an optimal goal for capitalist economies because, due to these characteristics, it can automatically maintain economic equilibrium. However, in some cases, it may lead to problems such as income inequality and increased competition. For this reason, many countries try to solve these problems by using measures such as price restrictions and consumables. We will discuss it in detail below.
Advantages of the Free Market
The free market has many benefits, which we will mention below:
1.Determining a Fair Price
In a open market, prices are set automatically based on the laws of supply and demand. This ensures that the price is set fairly and eliminates government price fixing, which may cause inefficiencies in price setting.
In this market, the competition between sellers to attract customers leads to the provision of quality products and services at reasonable prices. This increases the quality of products and lowers their prices.
Open market creates employment in most industries and economic sectors, and this increases production and increases production as an increase in income and wealth in the country.
The free market automatically directs people to different specializations and creates experts in different industries. This improves the quality of products and services.
The free market creates diversity in products and services because everyone freely participates in it. This makes customers have a better choice and the market in general gets the best situation for itself.
In this type of market, it creates flexibility against market changes.
7.Increasing Innovation and Invention
In this market, the diversity of business opportunities promotes enthusiasm and motivation for invention and innovation.
8.Improving Quality and Efficiency
Competition in this market improves quality and efficiency for manufacturers.
9.Removal of Assignments and Restrictions
In a open market, there are no obligations or restrictions on doing business, and people can reach agreements to earn money and develop their business.
10.Increasing Customer Choices
In the open market, customers have the greatest ability to choose the products and services they want, and in this way, the quality and efficiency of producers is improved.
Therefore, the free market is a competitive and economic environment in which supply and demand are regulated freely and without government interference, and the process of production, distribution and pricing of goods and services is done automatically. However, points such as the need to respect workers’ rights and environmental restrictions should also be taken into account.
Disadvantages of the Free Market
Despite all the advantages and positive features of the free market, this type of market also has some disadvantages and defects. Below are some of the disadvantages of the open market:
1. Inequality in the Distribution of Wealth
In the open market, players profit based on their ability and skill in attracting customers and artisans. This causes a great difference in financial ability and wealth among them, and as a result, it causes an unfair distribution of wealth in the society.
2. Banking and Financial Risks
In this market, companies and industries seek maximum profit and efficiency, and sometimes these efforts may lead to greater risks for banks and other financial institutions. These risks can cause the failure of banks and companies due to extreme price fluctuations and profit and loss fluctuations.
3. Low Supervision
In this market, the government and other institutions have less control over the actions of companies and businesses, because attempts to control or regulate the market may interfere with the freedom of companies and industries.
4. Environmental Problems
In the open market, companies’ efforts to reduce costs and increase profits can lead to an increase in air, water and soil pollution due to ignoring environmental problems.
Therefore, according to the mentioned disadvantages, the free market as a mechanism for regulating economic activities cannot be efficient alone. In fact, the government and other institutions should maintain their involvement in regulating the market so that it works for everyone. For example, the government can specify laws to regulate the market and activities of companies, products, and services in order to control prices. At the same time, it should be seen that too many interventions may cause the market to be inefficient and reduce the rents in it. For this reason, the balance between government intervention and the operation of the free market is very important.
Up to Sum
This type of market as an economic system has its features and advantages and disadvantages. In a free market, interaction between economic actors takes place based on market values and rules. It also gives people the opportunity to freely engage in their economic activities and make a profit. In addition, it is very efficient in terms of information transfer and balance of supply and demand. However, the open market also has disadvantages, including not guaranteeing equality of opportunity and a completely transparent environment, not taking care of the less fortunate, and the emergence of various rents in the market, which we discussed. Stay with the specialists of Uprodemy website to get business advice and international trade.