Explain in Detail the Principles Underlying the Free Market Economy

The Free Market Economy also referred as Capitalism and Laissez- Faire, is a type of economic system, mostly dominant in the Western world, where, the production and distribution of goods and services are determined by invisible market forces of demand and supply.   Thus, due to consumers and businesses deciding what they will purchase and produce, the allocation of resources and price will be determined by demand and supply rather than government intervention.   In other words, producers decide what to produce, how much to produce, or what to pay employees, and not the government.  

It would certainly make sense to point out here how the price mechanism works and dictates the prices in the market economy.   Usually, price goes down, if there is an excess supply of goods and services, while shortage of the same often leads to rise in prices.   Suppliers can either control the supply of goods and services or prices but not both, and should accept lower prices if they supply too much as well as expect increase in demand if they reduce prices.   On the other hand, consumers have the power and freedom to choose when to purchase or at what price, i.e if price is too high, they would be reluctant to buy, leading to fall in demand or vice versa.   These market forces of demand and supply makes the market economy a very competitive one where both producers and consumers can benefit.   Competitiveness is actually one of the main features of this type of economy, where consumers benefit from innovativeness, meaning quality products and value for money, while producers may enjoy greater profit.  

However, the market economy is not an ideal one as there are several drawbacks, which can affect consumers, producers and the whole economy to a great extent.    

In the first instance, for certain goods and services where there is no competition, producers may take advantage of consumers by charging high prices. For instance, when the sensational ipod music player was launched by...