The freedom of exchange allows people to exchange their goods and services. This creates a market where people who want to sell may do so and people who want to buy may do so. In a free enterprise system, all exchange requires the consent of all parties involved. There are a couple of facets to this freedom. The freedom of exchange is important for creating a place where supply can fill demand.
Types of Exchange
There are three different types of exchange in free enterprise. The first is between workers and businesses. Workers sell their labor to businesses, which reward the workers with wages and benefits. The labor being purchased by the businesses benefits them by allowing them to produce and earn a profit. The wages and benefits the workers receive give them the ability to care for themselves and their families. The second type of exchange is between consumers and businesses. Consumers exchange their money for the goods and services that businesses provide. Consumers are benefited by having the goods and services they want, such as groceries. Businesses profit on the sales, allowing them to have money that can be distributed to the owner or owners, or for reinvestment in the business to earn larger profits. The third type of exchange is inter-business i.e. businesses buying and selling from each other. For instance, a shipping company may purchase trucks from an automobile manufacturer. The businesses that buy receive what they need to operate to earn a profit. The businesses that sell profit from sales to other businesses. These three types of exchange work together seamlessly to create abundance in free enterprise economies.
Price & Quantity Determination
In free enterprise, prices and quantities of sales are determined through what is called “the free market.” The free market uses the principles of supply and demand to reach equilibrium, which is the point at which a buyer and a seller can agree upon how much will be exchanged and at what price. A cattle rancher might agree to sell ten cattle to a butcher at a price of one thousand dollars per cattle. The free market ensures that resources will go to those who are most willing and able to pay for them. In the previous example, a second butcher might be willing to pay two thousand dollars for each of those cattle. If there aren’t enough cattle at the moment to fulfill both the orders of the butchers, the cattle will be sold to the second butcher, who wants the cattle more. Thus, the free market allows resources to be efficiently allocated to those who demand them most.
Free enterprise uses the freedom of exchange to create a flow of resources throughout the economy. Resources are able to move unhindered between buyers and sellers. Each side obtains what they want, not through theft, but through providing what the other side wants. Building an exchange system on consent, options, and rights has proven to be effective in giving each member of society what he or she wants. Refer to “Free Enterprise System Definition and Characteristics” to learn more about similar freedoms.