Free enterprise, also known as capitalism, is an economic system where the individuals in the economy have the freedom to create business and conduct economic activity with little or no government intervention. Capitalism is the predominant economic system of the world economy; the system has several important advantages that make it an efficient way to organize the economy.

Overview

Free enterprise, also known as capitalism, is an economic system where the individuals in the economy have the freedom to create business and conduct economic activity with little or no government intervention. Capitalism is the predominant economic system of the world economy; the system has several important advantages that make it an efficient way to organize the economy.

Supply and Demand

In a free-enterprise system, the value of various goods and services are determined by market--that is all of the potential buyers of that good or service. For instance, if a certain good is scarce but in high demand, such as gold, the price will be high, while if a good is plentiful and demand is low, such as wood chips, the price will be low. The free-enterprise system tends to lead to socially optimal prices so long as there is adequate competition in the economy.

Incentives

One of the basic principles of economics is that people respond to incentives. In a free enterprise system, there is a large financial incentive to work hard and create successful businesses because the business owner is able to keep all the money he earns. For instance, in a free-enterprise system, a contractor could work overtime and make extra money, while in a different economic system such as a communist system, a worker might be given a certain wage by the government no matter how much he works. Taxes are opposed to a true free-enterprise system and tend to reduce the financial incentives of free enterprise as well as reduce economic activity.

Production

Free-enterprise systems force producers of goods and services to do so efficiently. If one firm creates products very efficiently, while another produces a similar product less efficiently, the more efficient company will tend to make profit while the other will lose money and eventually be forced out of the market unless they increase efficiency. The competition between firms puts pressure on them to innovate and create new ways to produce better products as efficiency as possible to outsell competitors.

Flexibility

One of the most important advantages of the free-enterprise system is the flexibility of the economy. In a free-enterprise system, workers can change careers and start up new businesses whenever they please. Individuals can attempt to launch new ventures in order to capture untapped markets and meet new demands as they arise. Firms that do not adapt to changes in demands will be forced out of the economy: essentially the system adjusts itself to produce the goods and services that people want and stops producing things that are no longer needed.