What Exactly is Free Enterprise?

Also known as a free market, free enterprise forms the basis of capitalism. And for a freedom-loving marketing professional, few things are more important.

That’s because a free economy is based on the laws of supply and demand -- central to giving customers the freedom to choose.

Free enterprise is defined as a free market economy that let’s consumers and businesses decide upon the appropriate flow of goods, products and services, with no/minimal state control. 

In a free market, the government doesn’t have central plans for their citizens’ economy. As such, consumers and private entrepreneurs control the marketplace with minimal or no government interference.

For marketing professionals, a free market is essential because our job is to be the best at matching our value proposition to the target market, who is free to make a decision based on what option will provide them the most value.

Below is a deeper insight into free enterprise, the benefits and why a free enterprise economy is by far the best option for an economy versus other options.

What is the Best Definition of Free Enterprise?

The best definition of a free enterprise system is one that is controlled by the market. Leaving the market to be dictated by the forces of supply and demand. The best way to define free enterprise is to understand its components including;

  • Citizens are free to choose which business they should open and how to operate
  • A right to own property
  • Driven by the desire to make and maximize profits
  • Free competition between producers
  • Consumers have a right to spend money freely

Just to clarify, consumers in a free enterprise system are people who choose to purchase products and services.

As such, the self-interest of consumers drives this economic system. 

In a free market, consumers decide where to spend money, what to spend on, and which business to purchase goods from.

Consumers are free to shop around to find the best goods at the best prices.

The biggest component of a free enterprise system is that consumers are free to choose. The same extends to citizens working as workers. They get to choose their preferred employment, which field to work in, and employers they prefer to work for.

On the other hand, businesses are producers of goods and services in a free enterprise system. 

They are tasked with producing high-quality goods and services and selling to consumers in order to make a profit and sustain the enterprise. Businesses should respond to consumer demands and what consumers wish to spend money on. Even though entrepreneurs can operate their preferred business, there is no guaranteed success of their businesses.

In a free market, the business that is best at providing what the customer wants at a price the customer is willing to pay, ultimately wins. Alternatively, the business that does not deliver what the customer wants at a price they are willing to pay, ultimately fails.

That said, a free enterprise system stirs economic growth and diversity by encouraging entrepreneurs to start various businesses. Several businesses providing the same goods and services promotes competition, which is beneficial for consumers. Competition between businesses to provide products and services means that consumers will enjoy good products at good prices. The competition also fosters innovation, as entrepreneurs find ways of maximizing profits.

What are the Benefits of Free Enterprise?

If everything operates smoothly, free enterprise is a wonderful economic system.

The benefits of an economy based on free enterprise include;

1. Unlimited Profit Margins

A free enterprise economy is based on supply and demand by promoting healthy competition. This is done as businesses focus on providing better goods and services than others in the market. Everyone wins, but most of all, the consumer wins.

If one entrepreneur finds a way of providing quality goods while increasing the profit margin, this inspires competitors to find innovative ways of attracting customers to their shops.

This competitive symbiosis is the basis of free enterprise and is a huge positive for the entire economy. Consumers benefit extensively when producers compete to provide better-quality goods and services in efficient ways.

2. Unmatched Efficiency

Stiff competition in a free enterprise system automatically creates market efficiency. 

The thought that your company is competing against another for the market pushes one to use all resources to maximize profits while reducing costs and risks.

Besides, consumers determine product/service demand, which forces businesses to regulate supply to avoid flooding the market.

3. High Rate of Economic Growth

Countries that operate a free enterprise system are associated with high economic growth rates.

Unlike other economic systems, citizens of the country are poised to become wealthier in a free enterprise economy. 

Increased demand and competition lead to the development of more companies and businesses.

This increases job opportunities, putting more income into citizens’ pockets, and this healthy cycle continues.

4. Flexibility

Another great advantage of a free enterprise system is economic flexibility.

In this economic system, consumers are free to change careers and start new businesses at any time.

Citizens can introduce new businesses to serve untapped market gaps or meet rising consumer demands.

Businesses that don’t respond to changes in market demand are naturally forced out of the economy (they go out of business) as the system adjusts automatically to produce goods and services that consumers need.

Production of unwanted products and services also stops.

5. Incentives

Like any other economy, citizens respond highly to incentives.

In this system, financial incentives drive people to work hard and open successful businesses since they get to keep the money they make.

For instance, contractors are motivated to work overtime to make extra revenue.

This highly contrasts other economic systems, such as communist systems, where the government regulates wages regardless of how much their citizens work.

Taxes are also opposed in a free enterprise system as they reduce financial incentives, reduce economic activity and limit freedom of choice.

In a free market, the value of products and services in a free enterprise system is regulated by the market.

For instance, if goods are scarce in the market but in high demand, the cost automatically rises.

On the other hand, if goods are in plenty and demand is low, the price drops.

A free market system is ideal because, at the end of the day, natural market forces will ultimately decide the proper course of action.



How to make a breakthrough in business (+Checklist)

Dictionary.com defines a breakthrough as a Sudden, dramatic, and important discovery or development of achieving success in a particular activity. […]

Read More »

Marketing Analytics vs. Business Analytics (helpful examples)

Businesses operating in the digital age have more access to customer data than ever before. This information includes a customer’s […]

Read More »

Why Is Budgeting Important to a Business? (+free template)

A business is often filled with excitement, enthusiasm, and optimism.  However, it becomes harder to achieve goals without a well-thought-out […]

Read More »