What makes a free market system attractive in theory?

Perfectly Competitive Markets

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Adam Smith's theory proposed that a free market system is the best way to provide an economy with the highest level of well being. His theory is founded based on the assumption that each industry operates in a competitive market. In perfectly competitive markets there are many small producers without any one them being able to control the market price. These firms produce a similar product. Additionally it is assumed that full information is available to both consumers and producers; new producers can easily join the market if profit rates are high, and existing producers can easily leave the market if there are economic losses. We will see in this section that, given these assumptions, producers will produce the product with the lowest cost per unit, charge the lowest possible prices for the product, and only receive a reward equal to the market value of their time and other resources that they own. This means that the small competitive firms will earn no excess profit. Furthermore, these small producers produce what people want, and if consumers' taste changes then the producers quickly respond by shifting resources away from what is no longer desirable to the products that the consumers now desire. In this section we learn how exactly this mechanism works, and we will also examine the validity of both its assumptions and its proposed outcomes.