A market economy is an economic system where two forces, known as supply and demand, direct the production of goods and services. Market economies are not controlled by a central authority (like a government) and are instead based on voluntary exchange.

Market economies rely on the interplay between supply and demand to function. “Demand” refers to the amount of goods and services people need or want. “Supply” refers to the amount of goods and services available for purchase. If the supply is low while the demand is high, it drives up the price that someone can charge for it. Conversely, if there is a greater supply of a certain good and people do not want it as much, the price will go down. The levels of supply and demand for any given good or service tend to move toward an equal balance—but this equality, if achieved, cannot be held for long, so the tension between supply and demand creates a fluctuating market.

Market economies have other characteristics as well. The concept of private property is central to the market economy, because it gives owners the right to sell their goods. Competition is also an important factor, because it affects supply and demand. When there is more than one seller of a particular good, competition to make a sale can drive down the cost of that good—and the buyer has a choice of where to shop, which gives them additional leverage they would not otherwise have.

Market economies evolved from traditional economies where people bartered for goods and services, and did not have a currency. As the concepts of money, voluntary exchange, and individual property rights developed, market economies arose as one of three modern economic systems. Another modern economic system is the command economy, where the government controls all economic decisions, in sharp contrast to the market economy. The government sets the price for goods and services and controls the means of production. The other modern economic system is a mixed economy, which has characteristics of both a market economy and a command economy.

Market economies are tied to capitalism, an economic system where private entities or people own the means of production. Capitalism needs the forces of supply and demand in the market economy to distribute goods and services and set prices. Conversely, command economies are tied to socialism and communism, where the collective group owns the means of production. Most countries today, including the United States, have a mixed economy with elements of both market and command economies.

Market Economies

Stores, like the Gap store in Costa Mesa, California, in a market economy function by principles of supply and demand.

capitalism
Noun

economic system where the free exchange of goods and services is controlled by individuals and groups, not the state.

Noun

type of economy where all property, including land, factories and companies, is held by the government.

competition
Noun

contest between organisms for resources, recognition, or group or social status.

demand
Noun

quantity of a product that consumers are willing to buy at a particular price.

democracy
Noun

system of organization or government where the people decide policies or elect representatives to do so.

economy
Noun

system of production, distribution, and consumption of goods and services.

leverage
Verb

to use, especially to use an existing asset.

market economy
Noun

an economy in which most goods and services are produced and distributed through free markets.

means of production
Noun

facilities and resources for producing goods.

supply
Noun

amount of a product that is available to consumers.