We know what is free market economy. Economy in which resource exploitation is based upon demand and supply. Let us categorize this more specifically.
Who make products in free market – Private individuals (that is ownership is not with government)
Are they free to make any number of products – Yes. There are no restriction but limitations to their production activities exists.
These limitations are
A) Consumer demand
B) Input raw materials
C) Availability of labor
D) Workplace hazard E) Cancel of license F) less profit etc etc.
A) Consumer demand – It plays main role in deciding output of a company. If the demand is less, company is making more products, then inventory investment (More money spent to take care of goods in godowns/shelf awaiting sale) goes up. Or a time can come when company has to shut down operation.
B) Input raw material – There is less availability of raw material than the actual demand. Availability is strenuous. Raw material are taking more time to reach the production unit etc etc.
C) Availability of labor – Objective of above reading is to explain this factor in realistic (Read as fantastic) manner.
Let’s say (on instance 1) there’s only one company in an economy and there are 10 independent labourer, working in the same company. Do remember we are talking about private individual company and not government owned unit.
Now (instance 2) a new company want to start business. They need labour too. This new company know, there are only 10 person available to work, who are in their comfort zone and not willing to leave their old work. Until unless new labor is not available, new company has to promise higher wages to labourers, so they agree to join them and leave their old job. Let’s say they offer 2x wage, of what they were getting earlier.
Here’s a surprise. Now old company decide to give 3x wage.
So where does this stop ?
Unless company absorb the loss itself, Higher Wage expense incurred by it, is going to result in higher product prices. When labor buy these products at higher prices (since we have only 2 companies), their higher wage is going to compensate against these prices.
” Salaries of workers in company is treated as an expense on its financial statement, known as Wage expense.”
If both decides to continue rivalry by absorbing losses, They have to pay to labor more than the owner of the business, so as to win the competition. This one seems Ridiculous
horror of economics.
Let’s bring some more options to this. More workers enters economy, Company start outsourcing the manufacturing, there can be innovation etc. etc. These options give the manufacturers upper hand, whereas earlier labor had upper hand.
This Labor upper hand Vs Producer upper hand decides Wage rate. A rate of remuneration to worker for his/her service. This rate provided can be for one hour, or for 8 hours or for each unit of output.
“In a free economy, Labor service is bought by producers and sold by workers at a price called Wage rate“.
Imagine opposite happens, that is more workers than actual work (i.e unemployment), labor service will be sold at cheapest price. To save workers from this situation, so that they stay above poverty line, governments have enacted Minimum wage laws to create a wage rate floor. This ensures basic remuneration workers will get for every type of work they do.