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What Is a Free-Enterprise System? Discuss Its Elements And Significance In Detail

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Free enterprise system

In an economic system where the enterprises face very less amount of restriction from the government policies is known as free enterprise system. In the business activities in free enterprise system, citizens of the country participate actively and hold the ownership of the business firms. This kind of enterprise system is also known as capitalism or free market. The owners of a firm under free enterprise system are permitted to make expenses at their will. Furthermore, many companies compete in a same business in free enterprise system and make the market more competitive and thus the prices in the system are low and the quality of goods is better. There is no restriction to change job sector and a person is free to opt his/her choice of career and make living out of it. Alternatively, there are many countries where free enterprise system does not exist. The types of system exist in those countries are popularly known as socialist system. Under this system, the government manages the social and economic affairs of the country directly, and in most of the cases the government sets the framework of jobs people do and have to abide by the rules of the government and in many occasions restrict people from owning businesses. In this kind of system limitations are also imposed on the purchase options of the people. For example suppose, an authority is restricting people from consuming more than one ice cream per day or the television network service provider making the choice of channels for the consume and thus the system is full of restrictions. Unlike this case, people are free to make their choices of consumption under free enterprise system. Moreover, the free enterprise system can further be categorized by taking into consideration the freeness of the economy. Thus, free enterprise system does not necessarily mean that every activity is free of restrictions. Among all the countries that depict free enterprise structure the most are the United States and Singapore, both the country thus have better stability in the market situations. On the other hand, there are countries that features mixed market structure that is the market is free in operation but there are regulations of the Government that restricts complete free operation.

Elements of free enterprise system

The key elements of free enterprise system are profit motive, private property rights, competition and equal rights for those who participate in the market. The profit motive explains that under free enterprise system business firms exist with only one major objective of making profit. The difference between total revenue earned by an enterprise and its total cost of production or generated service is known as profit. Profit can further be defined as the amount of monetary gain incurred by a business firm on selling its product or service. Free enterprise system depends on the capability of the sellers and buyers to attain the equilibrium in the market by reaching agreement on terms and conditions including prices for the sales of services and goods. In the free enterprise system, main objective of the firms is to maximize profit and create more wealth. It is the aspect where the concept of free enterprise system matches with the one of the key concepts of capitalism.

Entire control of a person over its own property is one of the key elements of the free enterprise system. The person that is involved in the free enterprise system enjoys complete control over personal property. Under private property rights, free exchange of property occurs without any discrepancies in the sales term and conditions. There are other types of systems in an economy under which property can be owned by groups or by organizations of the government. In addition to this, if any new participant enter the free enterprise system he/she earns the right to sell or dispose of the property according to the wish of the property owner.

On the other hand, equal rights are one of the key elements of free enterprise system. Under this one person can own an individual property and the all the participants of the market experiences equal rights. The main aspect of the free enterprise system is free interaction between sellers and buyers that lead to a balanced equilibrium, that is equal power of bargaining must exist in the market. Hence, true market driven competition is the key determinant of free enterprise system.

In free enterprise system, competition is one of the key factors that must be maintained. In free enterprise system, success of the existing business of the market happens when they are chosen by the market only. Not all the businesses that exist in the market succeed because of not providing the quality of product or service that other successful business firms provide. Therefore, it can be inferred that successful business firms only provide superior quality of service and product. The completion is one of the efficient process that leads to more effective innovation and technology improvement. This leads to production of improved quality products and an efficient and creative market system.

Significance of free enterprise system

An economic system should be such that it maintains a balanced market condition where no people be it seller or buyer experiences any kind of deprivation. In free enterprise system, all the participants are better off from seller to buyer and the labours that produces product or generated a service are paid off corresponding to their invested effort in the production or delivery process. Thus, free enterprise system encourages the labour section of an economy to participate more actively in the production process and thereby improve the quality of the product. Therefore, economic output of a country increases under the system and the country thereby flourishes. It is thus one of the close and effective substitute of the capitalist enterprise system without the cons of the capitalism. As a result, the countries that are not willing to adopt capitalism can consider the free enterprise system as effective option.


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