Laissez-faire: Supply and Demand and Demand Curve

Topics: Supply and demand, Inflation, Aggregate demand Pages: 10 (2900 words) Published: November 26, 2012
Laissez-faire is an economic environment in which transaction between private parties are free from tariffs, government subsidies, and enforced monopolies, with only enough government regulation sufficient to protect property rights against theft and aggression. The phrase laissez-faire is French and literally means “let them do”. But it broadly implies “let it be”, or “leave it alone”. A laissez-faire state and completely free market has never existed, though the degree of government regulation varies considerably.

The basic characteristics of Laissez-faire economic system
Free competition
The main body of the economic operation is for a large number of small private enterprises. Production and management strategies are made ​​by private capitalists according to changing in market supply and demand. Private capitalists are free to participate or exit the economic activity of any of industries. The form of price is spontaneous in market. It shows the change of supply and demand, it can distribute the scarce resources to producers, and also distributes goods and services to consumers. Consumer rights

Consumers are the main part of economic operation. Consumer rights show: private capitalists must be base on and consider the preferences of consumers in the coordination of production and management strategies. According to consumers in the market, the number of monetary voting (consumers use their own money to purchase their favorite products, it is also another form of voting), and understand the social consumption trends. Thus distributes human and material resources, financial resources, production and meet consumers demand to achieve the purpose of maximum profit. Consumers are the guidance of economic activity through the function of preference for certain goods and services. Protecting of government

Laissez-faire economic activities and resource allocation by the market mechanism to promote, the country or the government's economic functions are restricted to the protection of free competition, protection of private property, set up some necessary public utilities and public facilities.

The components are absence to function an idealized free market. The problems mainly in the following aspects: 1. The competition between enterprises is limited, and some may be a monopoly industries. In these cases, they will push up prices, up profits. 2. The lack of competition to promote efficient and profitable company... 3. Power and wealth may not equal distribution.

4. Some of the company's behavior is harmful to the society. 5. Private enterprise will not produce some of the whole society to their own advantage but without the product. 6. The free market economy could lead to macroeconomic instability, may appear high unemployment and production of the decline of the recession and rising prices.

Government intervention in the market can be used to achieve various economic objectives which may not be best achieved by the market. There are several policy instruments that the government can use. At one extreme, it can totally replace the market by providing goods and services itself. At the other extreme, it can merely seek to persuade producers, consumers or workers to act differently. Between the two extremes the government has a number of instruments, it can use to change the way of markets operating. These include taxes, subsidies, laws and regulatory bodies.

Taxes and subsidies
When there are imperfections in the market, social efficiency will not be achieved. Marginal social benefit will not equal marginal social cost. A different level of output would be more desirable. Taxes and subsidies can be used to correct these imperfections. Essentially the approach is to tax those goods or activities where the market produces too much, and subsidies those where the market produces too little. Taxes and subsidies correct externalities. Government imposes a tax equal to the...
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