Posted in Finance, Accounting and Economics Terms, Total Reads: 367
Definition: Free Market
A free market is one where the prices of goods is set by the equilibrium of supply and demand functions and this is free from any intervention from the government or any monopoly power. A free market economy is where prices are set by the forces of demand and supply only. This is a highly competitive market scenario among private players.
In this type of market buyers and sellers are allowed to transact freely without any intervention in the form of taxes or subsidies. There is no intervention by the government i.e. it does not impose any restrictions or regulations creating barriers to entry in the market. The quantity of goods produced and the price is determined by demand and supply alone. A purely free market does not exist because countries choose to impose some central regulations. Many countries forbid producers from contaminating, pricing below the cost of production or being a monopoly. In addition they are often required to disclose the ingredients, minimum safety standards, licensing of professionals and protection original ideas.
Many countries also control the money supply in the economy to minimize the negative effects natural economic expansion and contraction. In a democratic nation the government often impose many regulation to protect the values of the people. In autocratic or non-elected government they impose many market regulations, the people of the nation may feel oppressed. Pros and cons of a free market economy are major dividing lines between capitalist and communist economists.
It is also called capitalist economy where prices and wages are determined by unrestricted competition between companies without any government intervention. It is a concept where the allocation of resources in an economy is determined only by the supply and demand for these resources.
In financial markets, securities that are traded widely whose price is not affected by their availability are called free market stocks. A foreign exchange market is not controlled by the government i.e. the exchange rates are not pegged by the government and are controlled by the demand and supply for the currency.