Exchange (economics)

A market economy is an economic system where decisions regarding investment, production, and distribution are based on the interplay of supply and demand, which determines the prices of goods and services. The major defining characteristic of a market economy is that investment decisions, or the allocation of producer good, are primarily made through capital and financial markets. This is contrasted with a planned economy, where investment and production decisions are embodied in an integrated plan of production established by a state or other organizational body that controls the factors of production.

Market economies can range from free market systems to regulated markets and various forms of interventionist variants. In reality, free markets do not exist in pure form, since societies and governments all regulate them to varying degrees. Different perspectives exist as to how strong a role the government should have in both guiding and regulating market economies and addressing the inequalities the market naturally produces. Most existing market economies include a degree of state-directed activity or economic planning, and are thus classified as mixed economies. The term free-market economy is sometimes used synonymously with market economy.

Market economies do not logically presuppose the existence of private ownership of the means of production. A market economy can and often does include various types of cooperatives, collectives, or autonomous state agencies that acquire and exchange capital goods in capital markets. These all utilize a market-determined free price system to allocate capital goods and labor. In addition, there are many variations of market socialism, some of which involve employee-owned enterprises based on self-management; as well as models that involve the combination of public ownership of the means of production with factor markets.

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