Economics is the study of production, consumption, and transfer of capital. It is a branch of social science that concerns itself with goods and services. It helps in resource and capital allocation assuming certain resources or capital is limited. Today’s topic- How Are Goods and Services Distributed in a Free Market System?
Market systems are very important in economics and business development and the free market system is probably the most important. The free market concept is a partially theoretical market system that is used to highlight the interaction between producers or sellers and consumers of those products. For the most part, the goods and services can be produced how the company pleases without any regulations or limitations to adhere to. The producer or the seller has complete control over the distribution and the prices of the products.
Let’s get the basics first.
In economics, the most basic concept taught is that of the market systems. Why? Because how a company is built or structured is dependent on what type of market exists. The production of goods and services, their consumption, and distribution are governed by factors like the type of competition present in the market and the type of market that exists.
What is a market?
A market can be defined as the total number of sellers and the total number of buyers in a region. This region can be local to a town or city or the entire world. Or it can be defined as the place of interaction of buyers and suppliers or producers for goods or services.
Types based on regulations:
- Free market
- Government-regulated market
- Free market:
This type of market is free from any and all government regulations and policies, meaning that the government does not control or oversee the market and the transactions that occur in it.
Theoretically, this type of market is impossible to apply in real-life situations, due to its unregulated nature, the degree of freedom in a market can be calculated with respect to the amount of free flow of goods and capital between producers and buyers.
It is defined by the lack of restrictions and regulations and it is run by the incentive of profits.
While systems such as this are most favored by the suppliers as it allows them to do as they please sans any imposed limitations, it is not the best option for the masses. The lack of limitations can lead to bad product designs, contaminated food, and hazardous waste dumping since government regulation controls problems like this.
It is very rare to see completely unregulated systems since governments or union bodies keep companies in check to protect employees and buyers.
Examples of a free market are laissez-faire capitalism and voluntary socialism.
- Government-regulated market:
A regulated market is one where all companies, producers, and sellers have a set of regulations and restrictions that are placed on the procedure, products, and form of conduct that the production company and seller have to employ and adhere to.
The limitations placed are in effect to curb any and all harm that could befall the employees or the consumers of the goods and services of either the producer and seller.
It keeps the producer and sellers responsible for any foul play and damage that may occur. This leads to better quality, better devices, and a safeguard from unreasonably high prices and rights the consumer may have in terms of compensation for damages and to re-enforce safety standards.
There are various departments, governmental and unions, that regulate certain components of a business or certain products. For example, the food regulations are overseen by FSSAI (India), FDA (United States), FSA (United Kingdom).
Characteristics of a free market
- Private property: a majority of the resources are owned by private individuals or parties, who themselves decide how those resources are used and to what end. This results in increased private resources that the company can use as they see fit.
- Lack of authority: since this type of market lacks all regulations, including governmental and international regulation, the key players enjoy unrestricted and unlimited access to the market and are allowed to move resources without external monitoring.
- Capitalist-centric: a free market sees immense self-interest in the movement and distribution of goods and services. Due to this self vested interest in generating profits, the focus of economies shifts from social development to capital control.
- Competition: since anyone is allowed to make any product or variations of the product thereof, there is a lot of competition in the market to get the best product, with various features at the least possible cost to drive up sales. This not only helps in innovation but also in better development in existing products and services, as every product or seller is trying to do better than the others in the market.
Advantages of a free market
- Drives customer choices: due to the great number of products and variations, the customer decides which products do well and which don’t. The masses have the power to change product sales and the path of product development. This type of market is run on a supply and demand principle. More demand for a product results in increased production, low demands result in limited production.
- Freedom: an unregulated market leads to political and civil freedom since there are a lot of producers and sellers, the customer can decide where and what they want to buy and how they use the procured product or service.
- Limited bureaucracy: due to the lack of limitation and monitoring by bodies, companies are free to do as they please, whether it be connecting the products, their distribution, or development. The company does not have to wait for the government department to oversee the project, give it a green light, or okay the production. This reduction in time consumption paperwork helps save resources and capital that can be focused on the product.
Disadvantages of a free market
- Practicality: a free market cannot in practicality exist. Unregulated economic markets are the best to foster capitalism and to be capital-centric, which leads to misconduct and misinformation on the part of the producers or sellers to have the best sales number in the market. Such misinformation and misconduct can result in great damage and loss of life. To this extent, there will always be some form of limitation and a body that monitors products for the safety of the masses.
- Manipulation: unregulation in this market also extends to product labels, product information, and developmental process. Misinformation is the norm and important information like contaminants, hazardous materials are not needed to be disclosed. Meaning that what you see may not be what you get.
- Unbalanced power: a free market is marked by its openness to all. Anyone can establish a presence in the market and product services and goods. However, this isn’t completely true. Most of the time, the big players have absolute power when it comes to new business, and tehri product, enterprise, or business espionage and sabotage is common and widely practiced to keep competition low.
- No responsibility: While such leniency is good for innovation and prototyping, the same might not be said about the products’ safety features or any compensation in the case of harm. There is no policy that will highlight the wrongdoing as all things are fair game, and nobody to hold anyone responsible
Why is understanding the market important?
The type of market determines what the price of a product is and who is most likely to buy that product. Two other factors of price and product development are supply and demand. The type of market will define the supply and demand relationship and where the company and consumers stand on things like price setting, product manufacturing and distribution, and policies that govern them or the lack thereof.
- Are there any external costs associated with the products?
There are no external costs associated with the products, as external costs would refer to expenses borne by third parties associated with the product. In a free market, there are no third parties.
- Is the distribution of goods and services even through the socio-economic range?
No, while the free market does have freedom of movement of goods and services, the distribution of such itself is uneven, the first choice always going to the high-income demographic. The low-income demographic rarely receive some resources if at all.
- Is a free market possible to achieve?
A purely free market is a theoretical concept. However, some degree of freedom can be observed in most markets to facilitate movement for the growth of the economy.
A free market is exactly what it sounds like, a market with free, and for the most part even, movement of services, goods, and capital. One should also remember that it is very much a theoretical type of market and a very ideal form. In reality, such markets cannot exist due to the adulteration of goods as there is a lack of regulation. Moreover, such markets tend to be more beneficial for the rich as they can afford most high-priced goods, while the poor can not.