Free Enterprise Economy: Definition & Characteristics

As a small business owner, you opened the business you desired and decided how to operate the business, including setting prices for what you chose to produce or sell. You have these freedoms because a free enterprise economy is based on being free from excessive government interference. You likely considered consumer interest when opening your business and chose to supply products and services that are in demand. These choices also describe capitalism, which is a free enterprise synonym.

TL;DR (Too Long; Didn't Read)

A free enterprise economy is free from excessive government intervention.

Operating by Freedom of Choice

The hallmark of a free enterprise economy is the all-around freedom in the marketplace. Individuals can choose to go into any business they desire, either by themselves or with partners of their choosing. One of the major free enterprise examples is that when you decided to go into business, you didn't have to abide by laws requiring you to have a certain amount of experience related to that type of business nor did you have to check a government list of the number of similar businesses to see if there was room for yours.

Consumers in a free enterprise economy also have freedom of choice to purchase the goods and services they want from whatever company they prefer. To get consumers to buy your products, you make them better in some way than those offered by other businesses, whether it's the product itself that's better or your location, customer service or price. Individuals in a free enterprise economy have the right to spend their money as they wish, to open a business, to buy or rent property, etc.

Workers too are free to determine the business for which they work, and businesses can hire the workers they want. Though some government programs sometimes offer enticements to businesses to hire applicants who are in a minority, for example, you are not forced to do so.

A Free Enterprise Economy Is Driven by Supply and Demand

Instead of following governmental orders, a free market economy is governed by supply and demand. Businesses like yours supply what is in demand, or in other words, what consumers are demanding. Sometimes, businesses create a demand, such as a hot new toy for which consumers clamor, and then can't meet the demand fast enough. Consider every new game console or cuddly, talking critter that's in short supply in the peak buying seasons.

Manufacturers can charge top dollar for items that are hard to get even when they created the demand and the short supply. Later, when the items become well stocked and available, prices tend to come down. Another business may introduce a similar product that's better somehow, decreasing the demand for the earlier product. This is often the case with technology, from computers and software to cameras and phones.

Held in Check by Competition

Innovations don't stay new and unique for long, and soon competitors appear on the market. Businesses try to differentiate their product and/or their company. The original may claim that the cheap imitator is not as high quality as theirs, while the interloper claims that it's cheaper and just as good.

Competition tends to hold prices steady and within close range of competitors' pricing because consumers aren't willing to pay a lot more for the same item. No government entity sets the price for the products, but prices are set naturally by what the market will bear, or in other words, what consumers will pay.

Motivated by Unlimited Profits

Although competition helps to keep the market steady, there's no law putting a ceiling on the amount of profit you can make, which is another element and benefit of a free enterprise economy.

If it appears that a company is breaking laws to make more profits, such as hiring undocumented aliens at low pay or using dangerous materials because they are inexpensive, such claims will be investigated, and the company could be fined or could face other consequences. The fact that businesses are free to make as much profit as they can as long as it's done legally is a big motivational factor in a free enterprise economy.