Step ➊ : Define the 'free market' and explain the functions of enterprise in a free market economy. (Knowledge and understanding).


A market economy is an economic system in which production and prices are determined by the forces of demand and supply. There is an absence of government intervention.

Entrepreneurs carry out two functions in a market economy. First, the enterprise factor organises the other three factors of production which are, land, labour and capital. Second, enterprise involves taking the risk of production, which exists in a free enterprise economy. The return for enterprise is the profits that are made.

In this essay, we will explain the role of the factor enterprise in allocating resources in a market economy when there is an increase in the demand for a good.


Step ➋ : Explain how enterprise responds to an increase in the demand for a good. (application)


As there is an increase in the demand for a good enterprise will commit more factors to the production of that good in the expectation of further profit. This will be represented by a shift to the right of the demand curve leading to a higher price and a movement along the existing supply curve. The diagram below shows how enterprise responds to an increase in the demand for a good.