Does the free market involve the market forces of supply and demand?

Answer 1

Traditionally a free market without involvement of the government would be purely directed by supply and demand. As supply drops or demand increases, prices for a good go up - and conversely increasing supply or decreasing demand lower prices.

An additional level of complexity comes into play when you speak of fabricating goods from other goods; value can be added by turning raw materials into goods, allowing the producer to make more profit on the goods to be sold than was invested in purchasing the base materials.

A third level of complexity is based on international trade; goods that are at high supply and/or low demand can be transported to other places, where supplies are lower or demand is higher. This will occur when the potential additional profits exceed the cost of transporting and storing goods.

There are various forces that can affect a pure supply-demand curve, including:

• Governments prohibiting a good due to legal reasons
• Restricting or subsidizing trade with specific countries (import/export)
• Restricting or subsidizing trade of particular goods (import/export)
• Cartel forming between suppliers to control price and supply

In short, supply and demand are the basis of a free market, but in reality a lot of other forces affect supply and demand to alter the outcomes.