Definition: A free market system is an economy that allows the market to decide the prices of goods and services by way supply and demand, thereby reflecting individual preferences using direct resources.
What Does Free Market System Mean?
What is the definition of free market system? There is no governmental interference or monopoly price setting in a free market system. The exchange of goods and services between suppliers and consumers is voluntary, and all the business arrangements are decentralized. Consumers are free to make their economic and financial decisions, whereas suppliers offer their products and services based on demand.
On the other hand, economists insist that there is no free market in the real world. The free market system is more a theoretical concept as, governments always put some type constraints in the allocation of resources and the exchange of goods and services. An example is the minimum wages that are set by many governments around the world.
Let’s look at an example.
Example
A free market like the United States regulates itself by allowing the firms to set their prices. It allows businesses to seek new growth opportunities, providing them with an incentive to realize a higher profit. As a result, the competition gets more intense, and firms are competing in a perfect competition setting.
Ultimately, the prices of finished goods and services are declining, but there are a greater variety of high-quality products. In fact, a free market uses all of its resources to generate a profit by offering to consumers the products they need and want. The end result is a more efficient production of goods and services that meet the consumer needs, offered at the lowest possible prices and the highest quality.
Some economists theorize that the market does have some shortfalls when choosing price. That is why the U.S. government has set a minimum wage policy to protect the rights of workers. It has also designed antitrust laws to regulate the conduct of businesses, and promote fair competition towards the protection of consumers. Therefore, in the real world is practically impossible to have a truly free market, but the systems that are mostly free, like the US, are completely different than a command economy.
Summary Definition
Define Free Market System: A free market is an economic system where prices are set by supply and demand and is governed by the invisible hand.
