Market Economy

Written By:
Paul Tracy
Updated August 5, 2020

What is Market Economy?

A market economy is structured to allow market forces to determine prices with little or no government involvement.

How Does Market Economy Work?

In theory, a market economy's functions are based on fluctuations in supply and demand for specific goods and services across an entire market. This relationship results in market prices that efficiently distribute goods and services among market participants who are willing and able to pay for them. Regulations by government are theoretically unnecessary, since market forces shift supply and demand and signal price adjustments conducive for efficient exchange of goods and services. Capitalism in its purest form exists in a market economy.

Why Does Market Economy Matter?

Most developed industrial economies are a hybrid of market economies and government oversight. Fiscal and economic policies are implemented to protect the less fortunate and sustain overall well-being, include minimum wage laws, social insurance programs and subsidized health care.