hi everybody a free market it's any place where buyers meet supplies to exchange goods and services when we say a free market we mean free from any government intervention now what we've learned from prior videos is that at equilibrium in a free market p star q star in this situation allocative efficiency is attained and that is for three reasons firstly at equilibrium resources perfectly follow consumer demand that is supply is exactly equal to demand at equilibrium but also we are maximizing society surplus the sum of consumer and producer surplus and also we're maximizing net social benefit because marginal social benefit equals marginal social cost at equilibrium okay that's all great we've understood that from prior videos in this video though we want to focus on what the benefits of the free market are and what the issues with the free market can be that is the benefits of market forces versus the issues with market forces let's go to the pros first one of the major benefits is what we've just said that left to free market forces at equilibrium we are going to get allocative efficiency for these three reasons but deeper you will never get long run dis equilibriums because we know of the rationing function the signaling function the incentive function of price these core functions of the price mechanism will mean that any excess demands shortages or excess supplies surpluses will not exist and that is great news because shortages are major burdens on consumers surpluses a massive burdens on producers you're not going to get those in the free market given the functions of the price mechanism great news for consumers it means they're going to get exactly the quantity of goods and services that they desire at whatever the market price is good at the same time one of the core assumptions of a free market working well is that it's highly competitive and with that we get major benefits of competition in a highly competitive market prices are low consumer surplus is high quantity is high choice is high quality is high why because firms are competing with each other to compete they need to make sure they're giving consumers what they want and that's exactly what consumers want at the same time a highly competitive market will mean firms within it are going to be keeping their costs as low as possible and passing those cost savings on to consumers via lower prices fantastic benefits of competition similarly in a highly competitive market you're going to get a lot of dynamic efficiency a lot of reinvestment of whatever profits are made back into the business maybe in technology advancement in the form of research and development or innovation capital machinery upgrades and this again is wonderful news for consumers because we get brand new innovative goods and services with awesome new technology over time prices fall because costs are lower for firms given this technology advancement quantity improves quality improves choice improves over time given this reinvestment we get that in competitive markets job creation is high in very competitive markets because quantity is at its maximum level when quantity is high we know labor is a derived demand you're going to see more job creation but equally because quantity is high if markets throughout the economy are all competitive you're going to see very high levels of quantity being produced that's going to boost real gdp that's going to lead to economic growth and even wider job creation higher incomes living standards for all so job creation means good job opportunities for people the ability to earn higher income and to boost living standards good news with competitive markets similarly when we talk about a free market being free from government intervention individuals are free to live the life that they want to they've got freedom liberty choice they can consume the goods and services they want they can live the kind of life that they want without being coerced without being forced into doing things because the government says or any other institution says and that's great news because we human beings we love freedom we love the ability to live our life the way we want to live our life to make consumption decisions as we would like to boost our living standards that's a major benefit of a free market as well as number six without any government intervention you're not going to get the costs of intervention the risks of government failure but this is all sounding very very good there are issues what i will say is something that might really help you that is the memory divisive epic you can think that yes free markets are epic each letter here stands for something the e free markets promote efficiency we've already seen allocative efficiency is massively promoted in a free market p free markets promote productivity firms have to be as productive as possible to make sure they can compete to make sure they can hit their profits that they want that will mean keeping costs as low as possible passing that on to the consumer via lower prices free markets promote great incentives incentives for firms to produce goods and services that consumers want but also for firms to reinvest to be dynamically efficient to try and hit higher profits to make sure they're satisfying consumer demand that way too but also see free markets promote competition so from epic and what these letters all stand for we can derive a lot of the benefits that we've written down and just gone through but yes it's not all good news there is the other side to look at as well what are the issues with the free market well we know that markets can fail we're not guaranteed to get allocative efficiency in truth in getting in all of these pros we've made many assumptions if we dig down into those assumptions and for whatever reason they don't hold we can actually derive market failures so for example we assume that markets are very competitive there are many many sellers low barriers to entry what if that's not the case what if there is one dominant seller or a few dominant sellers with high barriers to entry you get monopoly or oligopoly power in the market and that can destroy the benefit of low prices and high quantity you get the reverse in that situation we assume there is good information in a competitive market what if there isn't what if information is imperfect well then consumers can't make rational decisions maybe they over consume demerits they under consume merry goods that's an issue we assume that firms are profit maximizers in a free market normally that's fine that means the incentive function of price will work really well but public goods will not be allocated with that motive the same time production externalities will be ignored when firms are purely focusing on profit similarly we assume consumers are utility maximizing in a free market normally great that means the rationing function of price is going to work really well but any consumption based externalities will be ignored in that situation you get market failure so market fairly destroys the argument of allocative efficiency in truth you get allocative inefficiency with market failure the same time in the free market you get efficient prices at equilibrium that doesn't mean they're fair you get problems of inequity especially if there is wide inequality that exists in society this might be a very efficient price of p star but it may exclude a lot of consumers from accessing the market from being able to afford that price and if this good or service is a necessity an essential good or service you might argue that's totally not right on the grounds of equity fairness that is absolutely not right if those on low incomes can't access a necessity market what about excessive profiteering we go back to the profit maximization objective that firms have but how are they making this profit maybe they're doing it in ways that society is not really a fan of maybe pursuing revenue trying to earn revenue in ways that morally maybe is a bit dodgy ways in which society is not a big fan of or maybe it's cost cutting firms are cutting costs in dangerous areas like with product standards health and safety standards environmental standards or wages we as society don't really want firms to act like that we can be concerned about that in the free market the same time we can argue there might be creative destruction we know in free markets there's a lot of movement in right firms respond to the incentive of higher profits by entering markets looking to make some of that profit themselves when firms enter markets they often do so creatively either with some slight innovation or with a lower cost of production way of producing a good or service but that creativity can actually destroy pre-existing firms in the market who now can't compete and as those firms are destroyed they collapse that can lead to high rates of unemployment which could be a concern and we also know how in free markets prices can be highly volatile especially in commodity and agricultural markets well we know demand and supply are both highly priced and elastic demand and supply curve shift a lot that's why we get a lot of price volatility when prices go up that's very bad news for consumers a burden on them when prices go down that's very bad news for producers they struggle to live when prices are very very low and to keep their business going to keep their living standards up so there are issues with the free market but there are major benefits as well by allowing markets to be free allowing market forces to work make sure you take those in really well that can form um incredible material for you in essays it can lead to great debates for you as well so i really hope you've enjoyed that video guys you've understood it well thank you so much for watching and i'll see you all in the next video [Music]