Cambridge AS A Level Business Studies/ ZIMSEC Advanced Level Business Studies/ Business Enterprise Skills Notes: Free Market Economy  

  • As has been said because resources are limited while needs and wants are unlimited
  • Society faces an economic problem of how to allocate its scarce resources
  • It has to answer three basic questions:
    • What to produce
    • How to produce and
    • For whom to produce?
  • The task of coming up with solutions to these basic questions often falls upon the government of that particular society
  • These questions can be answered using economic systems
  • An economic system is also known as an economic order
  • An economic system can, therefore, be defined as an organized way in which a state or nation allocates its resources and apportions goods and services in the national community
  • Overtime three economic systems have evolved to become the most prominent
  • Here we will examine one of them: The Free Market Economy

Characteristics/Features

  • This system is a spawn of the capitalist system
  • It is sometimes just known as a market economy
  • Within a Free Market Economy:
  • All the resources (factors of production) are owned by private individuals
  • Profit is the main motive of all business i.e. businesses are driven mainly by their desire to maximise profits
  • The government takes a laissez-faire attitude when it comes to managing businesses within the economy i.e. there is little or no government interference in business activities
  • Producers are free to produce how much they want, for whomever they want
  • Consumers are free to choose between different brands of the same product
  • Prices are determined by the market mechanism of supply and demand
  • Businesses are free to enter the market
  • There are no countries with a free market economy but the economies of the United States and Japan are close

NB

To access more topics go to the Advanced Level Business Studies/ Business Enterprise Skills page

To access more topics go to the Cambridge AS A Level Business Studies page

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