Free Trade, Market Equilibrium, and Economic Impact: A Detailed Report

This report examines the principles of free trade and its impact on consumers and producers. It highlights the benefits of free trade, such as increased access to goods and services, and the challenges it poses to local producers through increased competition. The report delves into the concept of market equilibrium, explaining how supply and demand interact to determine prices and quantities. It uses a graphical representation to illustrate the equilibrium point and discusses the market mechanism that drives prices towards equilibrium. The report concludes that while free trade offers advantages, governments should implement policies to protect both consumers and producers. The report also references key economic texts to support its arguments.

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Free Trade
Under free trade policy, the government does not meddle with imports and exports
through tariffs. However, free trade does not necessarily mean that the government deserts all
control and taxation of exports and imports. The theory of free trade is based on the reasoning of
Adam Smith. He argued that free trade facilitates the division of labor leading to specialization,
better efficiency, and high cumulative production (Arnold 58).
Impact of Free Trade on Consumers
Free trade presents numerous benefits to the consumers. Foremost, free trade means that
consumers have access to a variety of goods. Trade among countries makes consumers have
wide access to international market. Therefore, competition among firms increases leading to a
broad range of high-quality commodities. The high competition also helps to lower the price of
commodities and thus an improvement in the living standards of consumers (Arnold 58). For the
countries that are incapable of generating their own products due to climatic or geographical
factors, free trade plays a crucial role in guaranteeing stability in the supply of essential products
like food.
Impact of Free Trade on Producers
Free trade increases competition as thus poses a threat to local producers. In some cases,
the producers might find it difficult to compete with well-established companies and the chances

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of being driven out of the business are often high. Despite this, free trade promotes innovation.
In the face of stiff competition, firms are encouraged to innovate and create better commodities
to retain their market size and also gain new clients. Besides, free trade facilitates the movement
of technology from one country to another and producers benefit from technological
improvements (Sloman, Wride and Garratt 63). As a result, countries experience an increase in
economic growth.
In summation, free trade should not be condemned to be undesirable. Free trade avails
consumers a variety of products at a relatively low price and of high quality. It is as a result of
the free trade that companies are encouraged to innovate and also receive technology from
overseas market. While this trade is beneficial, the government should put policies in place to
protect the interests of both consumers and producers.

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Supply And Demand
The market price is as a result of interaction between the supply and demand. Moreover,
supply and demand depict the willingness of producers and consumers in engage in the selling
and buying. The product exchange occurs at the equilibrium price. On the graph 1, both the
sellers and buyers are prepared to exchange quantity Qe and at price Pe. At this point, demand
and supply are in balance.
Price
Quantity
Graph 1
At any price below Pe, there will be a shortage in the market because the demand will
exceed the supply. The consumers will have to pay a higher price to get goods. The higher price
will encourage the suppliers to bring more to the market and hence the price will move towards
the equilibrium. On the other hand, if the price is above Pe, there will be a surplus because the
sellers will supply more than what is demanded. The producers will have to reduce the prices to
sell. As a result of low price, the suppliers will reduce the supply and hence the price will tend to
move towards equilibrium. This tendency of price to move towards equilibrium is referred to as
market mechanism.
D S
Pe
Qe

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Works cited
Arnold, R. A. Economics. Mason, Ohio: South-Western, 2013.
Sloman, John, Alison Wride and Dean Garratt. Economics. 9th. Harlow : Pearson, 2015.