choose where, for whom and when they work. Consumers are very powerful, being free to accept or reject whatever is produced in the market place. This ’sovereignty’ ultimately determines production.The price mechanism balances the production and consumption of goods whilst assuming the following: firms seek to maximise profits; consumers seek value for money from their purchases; workers seek to maximise their wages relative to the human cost of working in a particular job. Adam Smith referred to this pursuit of self-interest as the “Invisible Hand”. Advantages of the Free Market Economy The main influence is that it operates automatically without the need for government intervention to either supply, demand or price levels. Also competition between firms keeps prices down and acts as an incentive to firms to become more efficient. The more firms who compete, means the more responsive they will be to consumer wishes. Situations where the competition level is high prevents any one person or company becoming overly influential.Disadvantages of the Free Market Economy Large firms may dominate an industry and this monopoly enables them to charge high prices and make large profits irrespective of consumer wishes. They may therefore lack incentive to improve efficiencies. By advertising, firm’s can mislead or create false impressions when persuading consumers who are susceptible to advertisements for products that are new to them and of which they have little knowledge. Another problem is that the free market economy may lead to macroeconomic instability, there may be periods of recession with high employment and falling output, and other periods of rising prices. Similarly, the overriding self interest motive may lead companies to act without any social or moral responsibility e.g. charitable donations.Command Economy To analyse the effectiveness of the price mechanism within the free market it should b...
