Free market in the economical world and business Explain how the system works to allocate resources The allocation of resources depends on supply and demand of those resources in a free market economy. The buyers and sellers, or their agents undertake all the exchanges and transaction voluntarily (Friedman, 2003: 36). Both the seller and the buyer accept the transaction because both expect to gain from it. Consequently, the two may repeat the exchange conditions the next time (or refuse to transact) if their expectation was met (or disregarded) in their past transactions. Ultimately, the reason for engaging in the transaction is that both the parties expect to benefit from the exchange. This is the main reason that distinguishes the free market from the free trade of the mercantilist period, expounded by French essay-writer Montaigne. According to Montaigne, the mercantilists held that in any trade transaction, there must be a loser and a winner: the loser is the exploited party while the winner is the exploiter. The mercantilists belief is invalid because the eagerness and even willingness of both the sellers and the buyers mean that they expect to benefit. Translating the trade of free market in modern game-theory jargon, transactions are a win-win exchange. They result to a positive sum rather than the conventional negative sum or zero sums game. Two factors determine the availability and allocation of resources in a free market: the value of the resources according to each participant, and the bargaining skills of the participants. How the buyers value the resources comparative to the other resources they could buy largely determine the distribution and allocation of these resources in the market (Friedman, 2003: 82). The exchange terms, or prices, depend on the quantity (measure) of the particular resource in the given market set up. Ultimately, the allocation of the resources depends on their availability measure in the market in relation to the evaluation of the buyers. In summary, resource allocation relies on their demand and supply. In the supply of a resource, an increase in its price reflects an increase in demand on the mind of the buyers resulting to more money bidding for it, thus the price of the resource shoots up. The reverse will occur if the price, and thus the demand, for the resource decrease. In contrast, the buyers evaluation is that the increase in supply of a resource brings the value of the resource down. The reverse occurs when the supply of the resource decreases. From the demand and supply effects on the allocation of resources, the free market incorporates a highly interactive and complex pattern of transactions. Arguments in favor of this system The manner in which the free market works to allocate resources has come under debate and criticisms by economists. Nevertheless, the free market has four distinct arguments that enforces it existence, and which are discussed accordingly. The first argument is the efficiency of allocating scarce resources in the economy. This argument relates to the neoclassical economic tradition of benefits for all the participants in the transaction. In a completely free market, supply of goods and services matches their demand.
Free market in the economical world and business
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