Free competition is an economic system in which the prices of products and services are regulated freely by forces of supply and demand and by patterns of consumer behavior. It is one of the basic characteristics of free market and the basic rule of capitalism.
Free market is usually compared against controlled or regulated market. Regulated market is an economic system in which the forces of supply and demand and other aspects of economy, such as who can enter the market, are controlled by the government (Tomasi, 2012).
Key concepts associated with free competition and free market
Supply and demand will be one of concepts where demand from the consumers says how much people are interested in a product or a service and how much are they willing to pay for it. Supply describes the availability of a product or a service and the prices that are set by businesses. In an ideal free market, those forces regulate themselves without any government intervention. Then there also is perfect competition which is a theory that describes ideal conditions of competition in free market. Those conditions include, amongst others:
- Equilibrium between quantity of all the products and services on the market and the quantity of those, demanded at the current price.
- Perfect information - everyone (both consumers and producers) knows all the prices of all the products and services on the market
- Rationality of consumers - buyers behave in a perfectly rational way when choosing where to allocate their money. Their only motivation is to increase their economic utility
- Low barriers to entry - it should be possible for a new producer to enter the market and be competitive (Röpke, 2012)
Criticism of free competition
The main criticism of the idea of free competition is that the ideal conditions required for a completely free market to work never occur in real life. Phenomena like monopoly, price fixing and irrational consumer behaviour are common problems in economy. In an actual world, government always has to regulate some aspects of economy (such as taxes, tariffs and laws) in order to keep the economic system from failure and recession (Baumol, 2002).
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- Röpke, W. (2014). A humane economy: the social framework of the free market, Open Road Media.
- Tomasi, J. (2012). Free market fairness, Princeton University Press.
Author: Mateusz Wójcik