Market Economy

AAA

DEFINITION of 'Market Economy'

An economic system in which economic decisions and the pricing of goods and services are guided solely by the aggregate interactions of a country's citizens and businesses and there is little government intervention or central planning. This is the opposite of a centrally planned economy, in which government decisions drive most aspects of a country's economic activity.

INVESTOPEDIA EXPLAINS 'Market Economy'

Market economies work on the assumption that market forces, such as supply and demand, are the best determinants of what is right for a nation's well-being. These economies rarely engage in government interventions such as price fixing, license quotas and industry subsidizations.

While most developed nations today could be classified as having mixed economies, they are often said to have market economies because they allow market forces to drive most of their activities, typically engaging in government intervention only to the extent that it is needed to provide stability. Although the market economy is clearly the system of choice in today's global marketplace, there is significant debate regarding the amount of government intervention considered optimal for efficient economic operations.

VIDEO

Loading the player...
RELATED TERMS
  1. Fiscal Policy

    Government spending policies that influence macroeconomic conditions. ...
  2. Keynesian Economics

    An economic theory of total spending in the economy and its effects ...
  3. Plunge Protection Team - PPT

    A colloquial name given to the Working Group on Financial Markets. ...
  4. Price Fixing

    Establishing the price of a product or service, rather than allowing ...
  5. Laissez Faire

    An economic theory from the 18th century that is strongly opposed ...
  6. Invisible Hand

    A term coined by economist Adam Smith in his 1776 book "An Inquiry ...
RELATED FAQS
  1. Should a small business test the substitution effect on its products before launch?

    Small businesses may evaluate the products and services offered by industry competitors to see if the substitution effect ... Read Full Answer >>
  2. Does the law of diminishing marginal returns only apply to labor?

    The law of diminishing returns is used by economists to describe a phenomenon occurring whenever additional production capacity ... Read Full Answer >>
  3. Is there any way to reverse the law of diminishing marginal returns?

    As production capacity continues to increase, a point comes when further increases in capacity no longer provide significant ... Read Full Answer >>
  4. Is demand or supply more important to the economy?

    Supply and demand are both key to economic activity. The two influence each other and impact prices of consumer goods and ... Read Full Answer >>
  5. Do supply and demand always cancel each other out?

    Supply and demand have an economic relationship that impacts pricing within a market economy. When demand increases, supply ... Read Full Answer >>
  6. What is the history of the market economy?

    The free-market system of voluntary economic trades, or the market economy, has existed in different stages ever since human ... Read Full Answer >>
  7. How does the Circular Flow Of Income model work?

    Economists use circular flow of income models as heuristic devices to represent how currency travels from one part of a market ... Read Full Answer >>
  8. Who determines interest rates?

    In countries using a centralized banking model, interest rates are determined by the central bank. In the first step of ... Read Full Answer >>
Related Articles
  1. Economics

    Market Economy

    In a market economy, economic decisions and prices are determined by market forces rather than by central planning.
  2. Economics

    Understanding a Free Market Economy

    Free market refers to an economy where the government imposes few or no restrictions and regulations on buyers and sellers. In a free market, participants determine what products are produced, ...
  3. Personal Finance

    State-Run Economies: From Public To Private

    Find out how former Iron Curtain countries used private enterprise to join the world financial markets.
  4. Economics

    What Is An Emerging Market Economy?

    Emerging markets provide new investment opportunities, but there are risks - both to residents and foreign investors.
  5. Economics

    What Is The World Trade Organization?

    The WTO sets the global rules of trade. But what exactly does it do and why do so many oppose it?
  6. Mutual Funds & ETFs

    ETF Analysis: Energy Select Sector SPDR

    Find out more about the Energy Select Sector SPDR Fund, the top holdings of this exchange-traded fund and the characteristics of the fund.
  7. Economics

    How Does China Manage Its Money Supply?

    Here's how the Central Bank of China manages its currency rates and the money supply.
  8. Investing News

    The Financial Singularity Will Destroy Your Return

    Given the current and future growth of financial technology, many believe algorithms will soon define what drives market outcomes. With a wealth of big data, algorithms would be able to create ...
  9. Economics

    What Happens to the Economy If China Deleverages

    Attempts to deleverage and institute reforms that will foster more sustainable growth could exacerbate an already slowing Chinese economy.
  10. Economics

    As Fed Prepares To Move, Gold Is Losing Its Luster

    Last week’s Semi-Annual Monetary Policy Report to Congress returned investors’ focus back to the fundamentals, and a general upbeat of the economy.

You May Also Like

Hot Definitions
  1. Nuncupative Will

    A verbal will that must have two witnesses and can only deal with the distribution of personal property. A nuncupative will ...
  2. OsMA

    An abbreviation for Oscillator - Moving Average. OsMA is used in technical analysis to represent the variance between an ...
  3. Investopedia

    One of the best-known sources of financial information on the internet. Investopedia is a resource for investors, consumers ...
  4. Unfair Claims Practice

    The improper avoidance of a claim by an insurer or an attempt to reduce the size of the claim. By engaging in unfair claims ...
  5. Killer Bees

    An individual or firm that helps a company fend off a takeover attempt. A killer bee uses defensive strategies to keep an ...
  6. Sin Tax

    A state-sponsored tax that is added to products or services that are seen as vices, such as alcohol, tobacco and gambling. ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!