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| 26th February 2017
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In a free market economy, the ‘invisible hand’ of supply-and-demand market forces defines what is produced, in what quantity, and at what price.
A market economy is a type of economic system in which the trading and exchange of goods, services and information takes place in a free market. A market economy may therefore also be known as a free market economy. The phrase is typically applied to countries or administrative regions that follow this approach.Since free markets are governed by the law of supply and demand, the market itself will determine the price of goods and services, and this information will be made available to all participants. Businesses can decide which goods to produce and in what quantity, and consumers and businesses can decide what they want to purchase and at what price.
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The opposite of a market economy is a planned economy, where the government decides what to produce, in what quantity, and to be sold at what price.
Mixed economies blend market and planned economies, meaning that the government will have some role in regulating the market, but all other activity will be driven by the decisions of buyers and sellers.
Since the government will always have some level of regulatory control, no country operates as a free market in the strict sense of the word, but we generally say that market economies are those in which governments attempt to intervene as little as possible, while mixed economies include elements of both capitalism and socialism.
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