A market economy is a type of economic system where supply and demand regulate the economy, rather than government intervention. A true free market economy is an economy in which all resources are owned by individuals. The decisions about the allocation of those resources are made by individuals without government intervention. There are no completely "free-enterprise" or market economies. The United States has more characteristics of a market economy than a command economy, where a government controls the market. In a market economy, the producer gets to decide what to produce, how much to produce, what to charge customers for those goods, and what to pay employees. These decisions in a free-market economy are influenced by the pressures of competition, supply, and demand.
2 One of the most important characteristics of a market economy, also called a free enterprise economy, is the role of a limited government. Most economic decisions are made by buyers and sellers, not the government. A competitive market economy promotes the efficient use of its resources. It is a self-regulating and self-adjusting economy. No significant economic role for government is necessary. However, a number of limitations and undesirable outcomes associated with the market system result in an active, but limited economic role for government.
3 In a market economy, almost everything is owned by individuals and private businesses- not by the government. Natural and capital resources like equipment and buildings are not government-owned. The goods and services produced in the economy are privately owned. This private ownership, combined with the freedom to negotiate legally binding contracts, permits people to obtain and use resources as they choose.
4 A market economy has freedom of choice and free enterprise. Private entrepreneurs are free to get and use resources and use them to produce goods and services. They are free to sell these goods and services in markets of their choice. Consumers are free to buy the goods and services that best fill their wants and needs. Workers are free to seek any jobs for which they are qualified.
5 A market economy is driven by the motive of self-interest. Consumers have the motive of trying to get the greatest benefits from their budgets. Entrepreneurs try to get the highest profits for their businesses. Workers try to get the highest possible wages and salaries. Owners of capital resources try to get the highest possible prices from the rent or sale of their resources. This "invisible hand" of self-interest is the driving force of a market economy.
6 Competition is another important characteristic of a market economy. Instead of government regulation, competition limits abuse of economic power by one business or individual against another. Each competitor tries to further his own self-interest. This economic rivalry means that buyers and sellers are free to enter or leave any market. It also means that buyers and sellers are acting independently in the marketplace. When businesses compete for customers, they want to sell their goods or services at the lowest possible price while still earning a profit for themselves. Consumers compete for goods and services. If the supply of a needed good or service is low, the consumer must pay a higher price. Consumers must compete to get goods or services by paying more or going out of their way to buy the products they need or want.
7 A system of markets and prices working together are the structure of a market economy, not the central planning by government. A market brings buyers and sellers together. The wants of buyers and sellers are registered on the supply and demand sides of various markets. The outcome of these choices is a system of product and resource prices. Prices are the guideposts on which buyers and sellers make and revise their free choices in furthering their self-interests.
