revert to producing economic products.A price ceiling will similarly distort the economy. Many producers will discontinue production due to its uneconomic nature and provide goods into the free market or unofficial market (black market) where the price mechanism is able to function. As these goods are in short supply the black market price will be much higher. This was illustrated in WW2 when food was in short supply and had to be rationed. Those with sufficient money would still obtain goods, on the black market.ConclusionAs the free market is based on the principle that individuals should be free to do what they want, it is not surprising to discover that the motive for all economic activity is Adam Smiths ‘invisible hand’ namely self interest. Each person in the economy attempts to do what is best for themselves. Firms will act in ways in which, they believe will lead to maximum profits (or minimum losses). Owners of land and capital will employ these assets so as to obtain the highest possible rewards. Workers will tend to move to those occupations and locations, which offer the highest wages. Consumers will spend their incomes on those things, which yield the maximum satisfaction at the most economic cost.Advocates of the price mechanism namely Smith believed that the individual pursuit of self-interest would lead to the maximum public good. In ‘The Wealth of Nations’ he argued that ‘By pursuing their own interests the individual frequently promotes that of society more effectively than they really intend to promote it.’ Milton Freidman’s assertions appear to agree in terms of the price mechanism in a free market economy and pursuit of self-interests. I have however highlighted shortcomings in this system in real life where it would appear that some form of mixed economy is likely to be most successful. The degree of intervention by the government or other authority should be o...
