Free Market

  

sA Free market is a market where demand and supply of product is not controlled by govt. or any other authority and the price of the product is determined by the joint approval of buyers and sellers. The proper functioning of Free Market requires absence of any kind of fraud in the market so that all the trades are morally voluntary in nature.

Basics of Free Market

The basic idea of Free Market involves occurrence of voluntary exchange. There should be no govt. regulation and no incidence of coercion or fraud. The presence of demand and supply is not enough for a Free Market operation if the decisions on demand, supply and price are not made voluntarily.

Demand for a product refers to wish of buying a product backed by purchasing power and Supply refers to nothing but the availability of that product in the market. The buyers offer a price for their preferred product and sellers offer their product at a particular price. Transaction happens when these two offers match and a price level is determined at which the both parties agree. When Demand exceeds supply, the sellers settle for a higher price and the buyers who can afford that price get the opportunity to own the product and others give up the purchasing. On the other hand, when Supply exceeds Demand, sellers offer low prices and engage in price competition to sell their product. Ultimately, the sellers who offer lowest price get their products sold.

In an ideal Free Market demand and supply operations and price adjustment ultimately lead to a point where perfect balance between demand and supply is achieved and this gives the equilibrium situation. At Equilibrium Price, the Free Market distributes the products among the buyers according to their requirement and purchasing power.In a Free Market there are no barriers to new entrants of the market.Though profit is generated, the existence of profit is not essential for a Free Market.

Free Market and Distribution of Wealth

Since there is no govt. control in Free Market the product distribution mainly depends on the purchasing power of the people. But, this purchasing power depends on social class, labor market and financial market. But, the theory of Free Market actually focuses on market of consumer goods whereas Labor Market and Financial Market ideas are quite complicated and vague. According to the Advocates of Free Market, Economic Growth is directly related with Economic Freedom but this cannot be proved theoretically and empirically.

An ideal Free Market requires absence of any kind of govt. regulation that is no taxes, no subsidies and no tariff barriers. But govt. takes steps to stop any kind collusion among the market participants which may result in coercion or fraud. For this action, the govt. imposes taxes only of that amount which is essential to fund such function. But, the govt. in no way regulates flow of goods and services or money transfers or the market price.

Criticism

Whether a Free market is good for the economy or not can generate many debates. According to some economists, Free Market Operations will inevitably result into market failures and to avoid these market failures, government intervention is a must. Many critics of Free Market Theory opine that, though the free market theory is based on concept of freedom, it actually works in favor of the wealthy class as it advocates anti-protectionism for the working classes.