vernment intervention and only through the price mechanism.Free Market EconomyThe price mechanism can only function within a free market economy. A free market economy is one where government intervention is at a minimum level and land and capital are privately owned. Consumers are free to decide what they want to buy and producers are free to produce, within moral standards, what they want and workers are free to choose where and how much to work. The price mechanism is what balances the production and consumption of goods, with the following assumptions made. That firms seek to maximise profits, consumers seek to get the best value for money from their purchases and workers seek to maximise their wages relative to the human cost of working in particular job. This is what Adam Smith referred to as the " Invisible Hand"The advantages of the free market economyThe fact that a free market economy functions automatically is on of its major advantages. It means that there is no need for costly and complex bureaucracies to co-ordinate economic decisions and therefore the economy can respond quickly to changing demand and supply. Also competition between firms keeps prices down and acts as an incentive to firms to become more efficient. The more firms there are competing, the more responsive they will be to consumer wishes. When there is high competition it stops one person or company from being hugely powerful because there is always a risk that someone will better you. Problems associated with the free market economyCompetition between firms is often limited. A few giant firms may dominate an industry and could therefore charge high prices and make large profits, rather than merely responding to consumer wishes. By attempting to persuade consumers by advertising they can lead people astray or create a false impression. Consumers are particularly susceptible to advertisements for products that are new to them and of which they have little kn...
