Arguments in Favor of a Free-Market System of Resource Allocation
Economics Assignment
Question 1.1: Resource Allocation
Economics for Business & Management Abstract In this section of the assignment we focus on the question: “Examine the arguments in favor of a free-market system of resource allocation”. (Negru, 2011) The arguments for and against a free-market system are not black and white, therefore they have been discussed among economists for hundreds of years and no solution or conclusion has been found yet. In this assignment we briefly discuss the basic concepts of a ‘Free-Market’ economy as well as the ‘Command-Market’ system and how our present economic structure relates to them with a final focus on resource allocation in a ‘Free-Market’ system. Introduction “A problem facing all consumers is that whilst our wants (desires) may be unlimited, our means (resources) to satisfy those wants are limited” (Griffiths and Wall, 2008). This basic theory of economics shows the main problem the market faces. It leads to the question of how to allocate scarce resources among a variety of products. The limitations can be shown in a ‘Production Possibility Frontier’ (PPF), where the limited amount of resources can be divided up between two products. Although it’s a good and easy method to identify boundaries and
Figure 1: PPF
possibilities, other factors influencing the market have not been taken into consideration in this graph (Samuelson and Nordhaus, 2009). Free Market System On the basis of a free market system, firms (suppliers) and customers (demanders) are the only two parties involved in the market (Investopedia, n.a.). Figure 2 shows that the equilibrium point, where supply and demand intersects at a given price for a given quantity, is where producer and consumer meet (Griffiths and Wall, 2008). Adam Smith stated that; a free market is guided by an “invisible hand”, which balances itself out without government
Figure 2: Demand & Supply
interference. Therefore the main belief of a pure market economy (=free
Question 1.1: Resource Allocation
Economics for Business & Management Abstract In this section of the assignment we focus on the question: “Examine the arguments in favor of a free-market system of resource allocation”. (Negru, 2011) The arguments for and against a free-market system are not black and white, therefore they have been discussed among economists for hundreds of years and no solution or conclusion has been found yet. In this assignment we briefly discuss the basic concepts of a ‘Free-Market’ economy as well as the ‘Command-Market’ system and how our present economic structure relates to them with a final focus on resource allocation in a ‘Free-Market’ system. Introduction “A problem facing all consumers is that whilst our wants (desires) may be unlimited, our means (resources) to satisfy those wants are limited” (Griffiths and Wall, 2008). This basic theory of economics shows the main problem the market faces. It leads to the question of how to allocate scarce resources among a variety of products. The limitations can be shown in a ‘Production Possibility Frontier’ (PPF), where the limited amount of resources can be divided up between two products. Although it’s a good and easy method to identify boundaries and
Figure 1: PPF
possibilities, other factors influencing the market have not been taken into consideration in this graph (Samuelson and Nordhaus, 2009). Free Market System On the basis of a free market system, firms (suppliers) and customers (demanders) are the only two parties involved in the market (Investopedia, n.a.). Figure 2 shows that the equilibrium point, where supply and demand intersects at a given price for a given quantity, is where producer and consumer meet (Griffiths and Wall, 2008). Adam Smith stated that; a free market is guided by an “invisible hand”, which balances itself out without government
Figure 2: Demand & Supply
interference. Therefore the main belief of a pure market economy (=free