The allocation of resources
THE ECONOMIC ENVIRONMENT
Assignment: The allocation of resources
STUDENT NAME: Shan Ji
A free market economy is an idealized form of a market economy in which buyers and sellers are permitted to carry out transactions based on mutual agreement on price without government intervention in the form of taxes, subsidies, regulation, or government ownership of goods or services. A free market economy is an economy in which the allocation for resources is determined only by their supply and the demand for them. This is mainly a theoretical concept as every country, even capitalist ones, places some restrictions on the ownership and exchange of commodities. If a commodity is in short supply relative to the number of people who want to buy it, its price will rise, producers and sellers will make higher profits and production will tend to rise to meet the excess demand. If the available supply of a commodity is in a glut situation, the price will tend to fall, thereby attracting additional buyers and discouraging producers and sellers from entering the market. In a free market, buyers and sellers come together voluntarily to decide on what products to produce and sell and buy, and how resources such as labour and capital should be used. Resources are simply the bargaining clout of each stakeholder, relative to each other. They define the amount of influence a stakeholder has on negotiations were they to be fully motivated. Profit means the excess of revenues over outlays in a given period of time, the advantageous quality of being beneficial.
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The functions of profit are encouraging the company to develop, encouraging the economic growth.
In reality there are no totally free or ideal markets in operation. Lack of perfect knowledge, monopolistic practices, cartels, taxes and government regulation bias the equilibrium points of most large markets in existence today. Participants engage in information bias practices such as insider trading and price fixing. Some believe that the notion of a free market is inherently unachievable because they believe that governments are fundamentally involved in markets through the creation and enforcement of property rights. Others argue that the concept of property comes from natural law and therefore it is incorrect to see governments as creating markets. Unlike copyright legislation, patents, as state granted monopoly rights, are commonly rejected.
In the ideal free market, the law of supply and demand predominates, influencing prices toward an equilibrium that balances the demands for the products against the supplies. At these equilibrium prices, the market distributes the products to the purchasers according to each purchaser's use (or utility) for each product and within the relative limits of each buyer's purchasing power. In the limited mathematical ideal market, this distribution of products is Pareto Optimal, meaning that no purchaser could have their purchasing limits filled in a way more useful to them without reducing the usefulness of some other purchaser's bundle of products. This type of optimality doesn't necessarily have anything to say about the distribution of purchasing power itself (which is often an input to the mathematical ideal market) - the optimality generally refers to the distribution of products given the pre-existing purchasing power of the purchasers. The necessary components for the functioning of such a free market include no artificial price pressures from taxes, subsidies, tariffs, or government regulation, perfect (or at a minimum, equivalent) knowledge about the value of the goods, geographic availability of goods to all people, and no artificial monopolies (patents etc.) or other forms of economic coercion on the part of the actors.
The state interventionism, which particularly applies to less developed nations, is restrictive import laws and regulations. Restricting foreign imports as a means to save jobs sounds plausible. Adding to the appeal of restrictive trade policy is the fact that its beneficiaries are highly visible while its victims are invisible.
At the heart of most interventionist policy is a vision of justice. Most often this vision evaluates the presence of justice by looking at results.
Social justice has considerable appeal and as such is used as justification for interventionist statism. There are several criticisms of the concept of social justice that Hayek has answered well, but defenders of personal liberty must make a greater effort to demystify the term and show that justice or fairness cannot be determined by examining results. The results people often turn to in order to determine the presence or absence of justice are educational and occupational status, income, life expectancy, and other socioeconomic factors. But justice or fairness cannot be determined by results. It is a process question.
Consider, for example, that three individuals play a regular game of poker. The typical game outcome is: individual A wins 75 percent of the time, while individuals B and C win 15 percent and 10 percent of the time, respectively. By knowing the game's result, nothing unambiguous can be said about whether there has been "poker justice.'' Individual A's disproportionate winnings are consistent with his being an astute player, clever cheater, or just plain lucky. The only way one can determine whether there has been poker justice is to examine the game's process. Process questions would include: Did the players play voluntarily? Were the poker rules neutral and unbiasedly applied? Was the game played without cheating? If the process were just, affirmative answers would be given to those three questions and there would be poker justice irrespective of the outcome. Thus, justice is really a process issue.
The most popular justification for the interventionist state is to create or ensure fairness and justice in the distribution of income. Considerable confusion, obfuscation, and demagoguery regarding the sources of income provide statists with copious quantities of ammunition to justify their redistributionist agenda. Income is not distributed. In a free society, income is earned. People serving one another through the provision of goods and services generate income.
We serve our fellow man in myriad ways. We bag his groceries, teach his children, entertain him, and heal his wounds. By doing so, we receive "certificates of performance.'' In the United States, we call these certificates dollars. Elsewhere they are called pesos, francs, marks, yen, and pounds. Those certificates stand as evidence (proof) of our service. The more valuable our service to our fellow man (as he determines), the greater the number of certificates of performance we receive and hence the greater our claim on goods and services. That free-market process promotes a moral discipline that says: Unless we are able and willing to serve our fellow man, we shall have no claim on what he produces. Contrast that moral discipline to the immorality of the welfare state. In effect the welfare state says: You do not have to serve your fellow man; through intimidation, threats, and coercion, we will take what he produces and give it to you.
The struggle to extend and preserve free markets must have as its primary focus the moral argument. State interventionists stand naked before well-thought-out moral arguments for private ownership of property, voluntary exchange, and the parity of markets. People readily understand moral arguments on a private basis--for example, one person does not have the right to use force against another to serve his own purposes. However, people often see government redistribution as an acceptable use of force. In a democratic welfare state that coercion is given an aura of legitimacy. The challenge is to convince people that a majority vote does not establish morality and that free markets are morally superior to other forms of human organization.