{"id":42650,"date":"2021-07-10T08:00:00","date_gmt":"2021-07-10T12:00:00","guid":{"rendered":"https:\/\/www.shortform.com\/blog\/?p=42650"},"modified":"2021-07-20T15:46:52","modified_gmt":"2021-07-20T19:46:52","slug":"free-market-economic-system","status":"publish","type":"post","link":"https:\/\/www.shortform.com\/blog\/free-market-economic-system\/","title":{"rendered":"The Free-Market Economic System: Explained"},"content":{"rendered":"\n

How does the free-market economic system<\/a> work? How are goods priced in such an economy?<\/p>\n\n\n\n

In the free-market economic system, products are generally almost equal to the marginal cost, <\/em>or how much it costs to keep a business afloat. Plus, modest profits convince investors to keep their money in the business than in savings.\u00a0<\/p>\n\n\n\n

This article takes a look at how the free-market system<\/a> and its implications for taxes and non-market goods.<\/p>\n\n\n\n\n\n\n\n

The Free-Market System <\/h2>\n\n\n\n

Imagine, for a second, that everyone in the world has <\/em>to tell the truth<\/a>. You go to a coffee shop, and the barista asks you what you\u2019d be willing to pay for the coffee. Being a caffeine addict, you reply, \u201c$15.\u201d But then, as the barista starts making the coffee, you ask, \u201cHow much did the beans cost? What about the machines, your salary, and everything else that it takes to run this place?\u201d You find out that the total cost to make the coffee is less than a dollar. You keep going: \u201cAre there any other places that sell similar coffee near here?\u201d you ask. The barista responds that there are and that they sell coffee for a much lower price. You tell the barista that you\u2019ll only buy the coffee at that lower price. You\u2019ve managed to haggle what would have been a $15 coffee down to less than a dollar. <\/p>\n\n\n\n

In a free-market economic system, when a seller sets an asking price, it\u2019s equal to or higher than the cost to produce it. And when a buyer buys the product, the product is as valuable or more valuable to the buyer than the money changing hands. As the above example illustrates, lots of buyers value coffee more than they currently pay for it\u2014you would have paid $15 for that coffee if necessary! Because the coffee market is competitive, though, firms are constantly trying to undercut one another to get your business. As such, the price of coffee is basically equal to the marginal cost<\/em>. <\/p>\n\n\n\n

This means that when it gets more expensive to make coffee, the price goes up. Anything from an employment shortage to a longer than expected cold season in Brazil can make coffee get more expensive. All of this exists within an incredibly complex global economy. We could choose to spend the money that we spend on coffee on anything else. If fewer people wanted coffee daily, there would be fewer coffee shops, and something else would go in that real estate. <\/p>\n\n\n\n

This is true in any industry. Think about how the rise of technology-based jobs changed the economy. As personal computers became increasingly popular, there weren\u2019t enough people who knew how to build them for the increasing demand. So, computer companies had to raise their salaries in the hopes of hoarding talent. Lots of people noticed that this industry was paying well, and so decided to go to college to get these high-paying jobs. They made the economic decision to spend money on college with the understanding that after getting a degree in computer science, they would be able to enter a high paying industry.<\/p>\n\n\n\n

There are a few principles that explain why the free market works so well:<\/p>\n\n\n\n