Thursday, November 18, 2010

What are the advantages and disadvantages of a free market economy? And what are the roles and needs in the business cycle?

A free market
economy has two key advantages. First, it allows for individuals to innovate. Individuals have
the freedom to create new ideas, new products, and new services to sell for profit. They are not
required to only produce what the government tells them to produce. Due to this freedom,
competition is created, forcing companies to create new products and features. A clear example
of this is the cell phone market. New phones come out each year, as individuals create new ideas
and new features for their consumers.

The second major advantage is that
customers drive decisions. If a customers wants a certain product or feature, the producer must
meet their needs in order to survive. This ultimately drives the price, as customers determine
the price of products.

However, disadvantages are created from some of the
advantages. Profit motive drives businesses, but can create dangers. Poor working conditions and
unethical decisions can be made as entrepreneurs seek higher profits. Secondly, free markets can
lead to market crashes as we saw in the great depression and the economic downturn in the early
2000's. Unemployment can lead to devastation of families.

These advantages
lead to economic growth and expansion during the business cycle. However, during times of
crashes and downturns, government regulation usually occurs to spur expansion
again.

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