An economy is responsible for dealing with the state of affairs in the production, distribution and consumption of goods and services. It is also involved in money circulation in a particular region or country. An economic system is a planned and organized way in which a nation or state allocates its goods and services in the national economy. The economic system that a nation adopts is dependent on the regulations and culture of the people in the region. There are four market economies: command economy, mixed economy, free market economy and traditional economy. Generally, there is no perfect economic system since they all have their strengths and weaknesses. This paper will discuss a free market economy as the most favourable market economy for a manufacturing firm.
A free market economy is an economic form that supports goods production and disposal with no or minimal government agencies’ involvement. This economic system is mainly based on demand and supply. In a free market, there is a decentralization of power and order, with people being free to make their economic choices voluntarily. Furthermore, a free market economy gives households and firms freedom to choose their interests in how goods are produced, who will acquire the produced goods and how resources are allocated (Rodrigo, 2017). There are numerous benefits that a free market process making it suitable for a manufacturing firm. At some points, the government is involved in the free market economy in case there is a need of providing merit and public goods.
One of the reasons why a free market economy would be suitable for a manufacturing firm is how it supports competition. Competition helps in driving down the prices of goods and services. This market system is guided by the principle that every actor plays in their best interest. eg manufacturers will work towards attaining maximum benefits and goal achievement. Similarly, consumers’ interests will be fulfilled by seeking cheap but high-quality products. Due to these conflicting situations, the price will be determined by the demand and supply of a given commodity or service (Rodrigo, 2017). This effect forces manufacturing firms to produce quality products as per the customers’ needs at a reasonable price to get more sales than their competitors. This will as well translate to a wide variety of choices for customers at low prices.
A free market economy helps in reducing wastage. This market economy uses the concept that consumers are free to choose what services and products they want. Theoretically, market economies, apply a capitalist market system that targets production with minimal resource wastage (Rodrigo, 2017). Manufacturers will therefore shift to activities that maximize their benefits through wastage reduction.
A free market economy offers business efficiency to manufacturing firms. For example, the government has minimal involvement in how business is carried out in a free market economy. Most of the government rules in a free market economy involve market players, the environment, national security and consumer protection. Minimal government participation enhances competition and efficiency. Due to competition, firms come up with better ways of cost reduction and sales increase increasing profits. Moreover, competition from different organizations encourages manufacturing firms to establish a way of realizing a competitive advantage and providing a large market for their goods and services. The practice, therefore, makes them improve their product quality and reduce costs to widen the market share.
Finally, a free market economy results in increased production. Money is a necessity in every economy to buy goods and services. In this type of market economy, the need for money increases motivation since employees need to earn more money to purchase their needs and live comfortably. According to human capital theorists, there is a direct relationship between skills, productivity and earnings offering benefits to both the employer and the employee. When people are motivated to work, a manufacturing firm will realize increased output and production. In addition, a free market economy realizes innovation as seen in most countries across the world that practices a free market economy. Since money is the motivation in this type of economy, individuals and firms try to innovate new technologies and products to acquire more money. Both individuals and firms are motivated to be innovative to gain a competitive advantage. This competition is advantageous to a manufacturing firm as they become innovative in the goods and services production. Innovation on the other hand brings about quality products, improved society and enhanced technology.
However, as said earlier, there is no perfect economic system and therefore free market economy has a share of its disadvantages. This type of economy exhibits a dangerous profit pursuit manufacturing firms try to maximize profit, they may end up adopting unethical and illegal ways. Such behaviours may have negative impacts on the firm, especially on the employees as the company may fail to observe safety measures (Alpagu, 2014). Also in a free market economy, firms may be tempted to cut corners since they are self-regulated. For instance, a firm may manufacture goods that have a high consumer demand that exceeds the market price. The companies may also pay low wages to employees or even avoid government regulations thus affecting the whole system.in addition, firms in this economic system have the right to increase the prices of goods and services which may cause a great economic growth challenge.
To offer a solution to these disadvantages, the government plays an important role in the free market economy as it helps in solving inefficiencies .allocation of resources to the needy becomes perfectly efficient when the government is involved (Lumen Learning, n.d., 2021).In an inefficient market, some people may have too many resources while others lack the same resources thus the government help in eliminating such cases through subsidies, taxation and regulations. Government intervention can offer better solutions to these problems e.g. through the provision of public goods as a way of supporting social welfare (Pettinger, 2020). The government is also involved in solving naturally occurring issues like inflations and recessions which can have serious effects on citizens.in such a situation, the government provide subsidies and manipulate the money supply to reduce the harsh effects of such forces.
References
Alpagu, H. (2014). The Contradictions of Free Market System and the Impacts of FDI and Foreign Trade on Economy, 1(1), 1-15.
Lumen Learning. Government Intervention and Disequilibrium | Boundless Economics. Courses.lumenlearning.com.
Pettinger, T. (2020). Should the government intervene in the economy? – Economics Help. Economics Help.
Rodrigo. (2017). critically evaluate the advantages and disadvantages of England being a mixed economy rather than a pure command or completely free market.
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