Main Features of a Free Market Economy

Property Rights:
Property rights are social institutions that govern the ownership, use and disposal of resources, goods
and services.
There are different types of property which individuals and firms can privately own:
(1) Real property which includes land, buildings, durable goods such as plant, capital equipment etc.
(2) Financial property which includes shares and bonds, bank deposits, money kept at home.
(3) Intellectual property, which is the latest addition to the list of property, represents the products of
creative effort and includes books written, audio and video material, computer programmes etc.
It is important that government should enforce the property rights. If property rights are not enforced,
then the incentives to use the property efficiently is weakened and the potential gain from its efficient
use will be lost. Enforcing intellectual property rights is proving to be a big challenge these days in
view of the modern technologies that make it relatively easy to copy books, audio and video material
and computer programmes.

Freedom of Private Enterprise:

Allied to the property rights is freedom of enterprise which is another basic feature of a market
economy. Freedom of enterprise means that everybody is free to engage in whatever economic activity
he pleases. In other words, he is free to choose to work in any industry he likes or adopts any
occupation or trade he desires.

No government Interference in the Business Activities:

A Free Market is a free, cooperative and peaceful process. A Free Market does not require
government-dictated centralized planning, control, coercion, and compulsion. A Free Market does not
require high taxation or excessive regulation to function effectively. Indeed, a Free Market functions
best with minimum government interference.

Profits and Prices:

No individuals would work and save if adequate incentives are not provided to them in the form of
wages and interest respectively. Similarly, the firms will not produce goods and services and bear risk
of losing money if sufficient incentives are not given to them.
Profits are earned from undertaking the task of producing goods and services and introducing new
products and new techniques of production. Profits earned by the firm depend on prices of goods and
services produced and cost incurred.
As seen above, in a perfectly competitive market firms are price takers that are they take price of a
product or service as given. With a given price, firms profits will be larger, if cost per unit of output is
smaller. Therefore, in order to maximise profits, firms try to minimise cost for producing a given level
of output. Thus profits serve as incentive for the firm to produce efficiently.

The working of price system ensures that those individuals and firms will get goods that are willing and
able to pay for them. Prices of goods and services indicate how much money individuals are prepared
to pay for them. In other words, prices convey information to the firms about how individuals value
different goods and services.
The goods and resources which are relatively more scarce will have higher prices in the market. On the
other hands, the goods and resources which are relatively less scarce will have low market prices. The
profit motive induces firms to respond to the prices of different goods.

Competitive Markets:
In ordinary speech the word market means a place where buyers and sellers meet to buy and sell goods.
In economics, market has a wider meaning and is interpreted to mean any arrangement that enables
buyers and sellers to exchange things; they may contact each other through telephone, fax or direct
computer link to negotiate prices of goods they buy and sell. In our above example, rational and selfinterested consumers and profit-maximising firms contact each other through any media and buy and
sell things on the negotiated price.
The self-interested consumers are interested in low prices of goods they buy and, on the other hand, the
profit-maximising firms will be interested in charging a higher price of the goods they produce and
offer for sale in the market. However, through their interaction they may agree to buy and sell goods at
the agreed price.
In the basic competitive model of a market economy, it is assumed that neither the consumers, nor the
firms have any market power to influence the prices of the goods and services they want to buy and
sell. In fact, the economists generally assume that perfect competition prevails in the market.

Consumer Sovereignty:
In a free market economy there is a freedom of choice for the consumers to buy goods and services
which suit their tastes and preferences. In a market economy only those goods and services are
produced if the firms producing and supplying them are able to sell them at a profit.
Now, profits are made if goods or services produced are sold for more than what it costs to produce
them. Therefore, firms cannot expect to make profits, if they do not make goods or services which are
not in accordance with the preferences and demands of the consumers and also for which consumers
are not willing to pay adequate price.
Since firms are guided by profit motive, they will produce those goods which ensure greater profits to
them. Therefore, in what goods and in what quantities will be produced by firms is dictated ultimately
by the tastes and preferences of consumers who in a way vote for the goods they buy.
This is generally called the principle of consumer sovereignty. This means in a market economy the
consumers are just like a king or sovereign who dictate what goods and services and what quantities of
them are produced.