• Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

Outline the ways in which the price mechanism allocates resources in a free market economy.

Extracts from this document...


Outline the ways in which the price mechanism allocates resources in a free market economy In a free market economy, the price mechanism allocates resources through the forces of supply and demand; social costs, such as pollution and noise are not taken into consideration by individual firms. The firms produce on the basis of self interest ie what option brings the most profit, maximising behaviour and not considering external costs. The problem in a free market economy remains the same as in any other; what, how and for whom to produce. The individual firms must decide what proportion of capital and consumer goods should be produced to maximise the firms profits(we are assuming the firm is a profit maximiser) I would draw a demand/supply graph here The diagram shows what is supplied and demanded at any given price. This concept is essential for understanding resource allocation in a free market economy since resources are allocated depending on the demand for whatever good. ...read more.


The constant cycle causes uncertainty among consumers and firms. When the government increases interest rates, for example, as a means of reducing inflation, the economy may go into recession. In a price mechanism economy, certain undesirable market structures emerge, monopolies being one form. A monopolist may earn abnormal profits due to its ability to be the unique provider. This is undesirable, some production may fall due to the lack of competitivity and prices may rise, affecting consumers. In the U.S., Microsoft was attacked by anti trust lawyers for trying to create a monopoly which would be against the interests of consumers. Oligopoly may also prove to be bad, since cartels may be created thus again allowing firms to make abnormal profits by restricting competition and increasing prices. Inequality emerges in the price mechanism. Different social groups have different lifestyles due to the ability, or lack of it to buy goods. If the price mechanism worked for merit goods such as hospitals, then many poorer people would suffer from being unable to pay for it. ...read more.


Without government intervention, there would be no set uniform national curriculum. Those who could afford better education would be given better chances. The class gap would widen because the upper classes would obviously be able to pay for the best. The distribution of income would thus be almost non existent, due to the well off people being able to take on better qualified jobs. However, government intervention may lead to a lack of competitive efficiency in the education market. If no government intervention existed, then each school would constantly try to increase its competibility to get ahead of the others. The result would be ever increasing national levels(providing agreements between the schools were not formed.) If the price mechanism allocated teaching resources then better teachers would be better paid, thus increasing the incentive to work. However, if say for example, vouchers were issued by the government and parents were free to spend these on the schools of their choice, then the worse off schools may be ignored by parents thus causing small local schools to close down. ...read more.

The above preview is unformatted text

This student written piece of work is one of many that can be found in our GCSE Economy & Economics section.

Found what you're looking for?

  • Start learning 29% faster today
  • 150,000+ documents available
  • Just £6.99 a month

Not the one? Search for your essay title...
  • Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

See related essaysSee related essays

Related GCSE Economy & Economics essays

  1. Main characteristics of free market economy

    In addition, the increase in unemployment will cause wealth and income disparity amongst the population which is a regular drawback in the Market Economy. During China and Russia's transition from a planned economy to a market economy it was evident that a large portion (3.6%)

  2. Free essay

    What are the main characteristics of a free market economy and centrally planned economy?

    In a free-market, the high incentive will stimulate the entry of firms, depending on the type of market i.e. oligopoly, monopolistic competition, perfect competition, or monopoly, which will create a lot of competition between firms, and thus more efficient production of goods and services to satisfy the consumers demand.

  1. Critically evaluate the perceived competitive starategies of the five clothing retail outlets, namely Edgars, ...

    The total textile industry will suffer from business lost to duty-free imports due to the various rebate facilities, fraudulent imports and possible increased imports due to the general reduction in customs duties. Volume of production will be under pressure. Soft consumer demand and reduced disposable income will lead to fierce

  2. This report will establish the opportunities and threats presented to Sony by the EU ...

    So the government are depositing more money into the economy. Sony already has a plant in Barcelona that has been there since January 1973 which manufacture colour TV, TV components etc. This shows (especially that it is still open) that it has been successful and consumers have been contributing to its success also it is accessible to the African continent.

  1. To what extent do market failures result in a similar optimal allocation of resources ...

    Graph2 The demand curve indicates the marginal valuations of this particular product and it is assumed that a single monopoly supplier produces the goods with constant marginal costs - c and sets prices above marginal costs at P. The private rate of return is B as the firm exploits its

  2. What are the disadvantages of a free economy? How might they be overcome? Would ...

    If a person was to lose their job, they would have to find another job, probably in a different industry, so they would have to get training, which would take a lot of time. Other employers might not even employ them, it is a vicious circle.

  1. Economics Coursework: The Price Mechanism - House prices.

    are also other factors to take into account that effect the demand for a property, these are � It's size � It's age � It's location Buying a house takes far more money than most people usually have available, and so they often have to borrow a loan from a

  2. Liberalization: where it has lead us and where it is headed

    So I'm always in favor of lowering taxes. However, special tax breaks for specific types of business-such as infrastructure or software or export businesses-is, to my mind, bad policy. It distorts decisions regarding allocations of resources away from what is efficient.

  • Over 160,000 pieces
    of student written work
  • Annotated by
    experienced teachers
  • Ideas and feedback to
    improve your own work