What is Free Market Economy?
In a Free Market Economy, the production of goods and services is determined by consumer demand rather than controlled by a central government.
Since supply and demand in the market set the prices in a free market, the allocation of resources, the production levels, and the distribution of wealth flows toward the businesses that contribute superior value to consumers (and to society as a whole).
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What is the Definition of Free Market Economy?
The concept of a free market economy is closely tied to capitalism, wherein the supply and demand forces present in the market dictate the decisions by businesses on how to operate.
For instance, the pricing of specific goods and services is set based on consumer demand, and employee wages are a function of the supply of qualified employees (and their willingness to be employed in the role in question).
The free market economy is characterized by supply and demand determining the decisions made by market participants, all with minimal government intervention.
The profits created in a free market economy are intertwined with the market’s supply and demand forces, the production capacity of the businesses participating in the market, and the utilization of resources by consumers.
Due to the limited involvement of the central government, natural market forces are what determine the employment rates, total output with regard to productivity, and the pricing of goods and services.
The private sector produces the goods and services that circulate the economy. Most properties are privately owned by individual consumers (and businesses run by consumers) instead of governmental entities.
How Does a Free Market Economy Work?
The following attributes are some of the most notable characteristics of a free market economy:
- Ownership → In a free market economy, the private sector controls the economy for the most part, rather than the central government
- Incentive Structure → The primary motive for market participants is profit-oriented, wherein businesses that offer the most value to consumers (and society) on a relative basis are rewarded with greater monetary profits, i.e. entrepreneurship tends to be rewarded more.
- Market Dynamics → The supply and demand in the market sets the pricing in a free market, the allocation of resources, and the production levels (i.e. output) – therefore, businesses must strive to meet consumer demand and become more efficient.