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A free market is an economic system where goods, services, and money are exchanged voluntarily. Value judgments are made by individuals based on personal preferences, needs, and wants. Voluntary exchange is crucial, and most modern free markets use money as the main commodity. Prices are guided by the laws of supply and demand.
A free market is an economic system that is generally characterized by the voluntary exchange of goods, services, and money. An example of a free market can be characterized as a system in which two people can freely exchange money, work, or other personal property to benefit both parties. Each person on such an exchange often considers the product being offered to be more valuable than what they are exchanging for it.
When operating in this type of system, each party involved in an economic exchange must make a set of value judgments. These decisions are generally based on a variety of factors, including personal preferences, needs, or wants. These can range from basic human needs, such as food and shelter, to more complex desires for convenience, status, or security. In a free market, these value judgments are driven by the consumer.
A simple example of exchanging personal property might be two young students who meet at lunch to exchange food. One child has an apple, while the other has an orange. The student with the apple makes a value judgment about apples and oranges and decides that she prefers oranges. She is willing to give up what she has to get what she wants. The other student makes the opposite value judgment, and the two exchange fruits.
Voluntary exchange is the most important aspect of a free market. For an economy to be a free market, in its purest definition, there can be no external influence or coercion on the economic decisions of individuals. Most of the world’s economies are not fully free markets and include some form of regulation.
Most modern free markets use money as the main commodity for free exchange. Money can only work if people in the free market think it has value. In other words, most people will accept a standard currency in exchange for goods and services, because they know that most people in that society will also accept it.
The concept of price refers to the established or agreed exchange rate for different items. For example, just like the kids at the school mentioned above traded individual pieces of fruit, an administrative assistant can trade an hour of her work for $10 US dollars (USD). In a free market economy, governments or other organizations do not control economic decisions, so the laws of supply and demand are often the main economic principles that guide prices. In general, statistics show that if the supply is higher than the demand, the prices tend to fall, but if the supply is less than the demand, the prices tend to rise.
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