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Main characteristics of free market economy

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  • Essay length: 1979 words
  • Submitted: 14/11/2007
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GCSE Economy & Economics

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Economics Essay

A Market economy (free market economy) is a social institution where the basic economic problem of "what, how, for whom to produce" is solved by the firms and consumers who decide what they will produce and purchase, as opposed to a Centrally Planned Economy in which the government controls the basic economic problem. In a Market economy the "means of labour" are owned mainly privately, which enables the owners to act in accordance with their own self-interests. Everybody acts on their own behalf, yet everybody's actions are aimed at the satisfaction of the consumer's needs as well as at their own satisfaction. This system is manoeuvred by "price mechanism" where the prices of goods and services are not set by the government but by the interchange of supply and demand in which the price acts as a signal for suppliers to increase or decrease supply and reach equilibrium between the supply and demand and optimal allocation of resource. Through the price mechanism supply is shared, income is distributed and resources are allocated efficiently.

The production and allocation of the goods and services are done through the system of free markets. A

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