A market economy is an economic system in which most resources, including goods and services, are allocated through voluntary and mutually beneficial interactions between buyers and sellers. In a market economy, the prices of goods and services are determined by the demand and supply of goods or services in the open market. Production, consumption, and investment decisions are made subject to the price signals from the market. The price mechanism is such an important tool in market economies that it is known as the “invisible hand” of economic coordination.

A market economy is different from scripted economies such as those of Cuba or North Korea, where goods and services are only produced, distributed and exchanged in accordance with the orders of the central government. In market economies, the role of the government is generally to pursue economic policies on taxation, investment, and regulation, but it usually does not decide which goods or services should be produced, who should produce them, or what price they should be sold at. The freedom of individuals and enterprises to choose what they produce and consume, and how they distribute it, are what distinguish a market economy from other economic systems.

In a market economy, goods and services that meet consumer demand will generally fetch higher prices than those that do not. By relying more heavily on the price mechanism to allocate economic resources, market economies are able to more efficiently coordinate who produces, who consumes, and what resources are available for production. This makes market economies particularly well-suited for economies with an expanded scope of business that roll out a variety of goods and services.

It should be noted that there is no one-size-fits-all market economy. Market economies are composed of a variety of different actors, each pursuing their own objectives and interests within the context of overall market forces. Different countries use different elements of market economies in different ways, and it is important to remember that market economies are subject to the influence of factors such as politics, culture, and geography. In spite of this, however, economists broadly agree that a system composed of largely free market actors and prices is the best way to coordinate the production and consumption of goods and services.