Chapter 11R, Problem 3CTQ

To determine

The potential pros and cons of a free market.

Explanation of Solution

There are some pros of a free market as mentioned below:

• Free market is beyond government controlled which allows the firm to innovate new product with new technology and features.
• The firm can utilize their resources in research and development as their remains absence of red tape which reduces administrative cost.
• Customers are drivers who decide on accepting the new product or rejecting it. This increases the chances of better product development.

Due to absence of government control, firms are free which also has some cons as mentioned below:

• The products offered to customers have limited range as they only produce goods that are profitable for them.
• The firms that operates in free market economy may sacrifice welfare activities such as offer poor quality of products, welfare of employees, usage of substandard raw material, etc. to earn maximum profit at low cost of production.
• Due to free market economy, market failure is possible which can cause severe damages to economy, people becoming jobless or homeless, etc. For instance, great depression of economy in 1930 and market crash of 2008.

Economics Concept Introduction

Market structure: Market structure can be broadly classified into four categories i.e. perfect competition, oligopoly, monopolistic competition and monopoly market. Free entry and exits is allowed in perfect competition whereas some restrictions are imposed on oligopoly and monopolistic competition. High barriers to entry and exit prevail in monopoly market.