Market Economy

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Definition of a Market Economy:

A market economy is a system in which individuals and businesses are free to make their own economic choices.

Detailed Explanation:

In a market economy, market forces determine the price of goods, the quantity produced, and their distribution. Individuals and companies decide independently what to produce, how much to produce, and who consumes a product or service. In 1776, economist Adam Smith published The Wealth of Nations, an influential text that promoted market economies. He concluded that individuals acting in their own self-interest make the best decisions for society as a whole. Smith believed individuals seeking to better themselves look to provide something they can sell because buyers are only willing to purchase goods or services that benefit them. Producers are interested in producing efficiently because doing so minimizes their costs. Society benefits because efficient production minimizes waste. The government would not interfere in economic matters in a pure market economy.

Dig Deeper With These Free Lessons:

Economic Systems
Fundamental Economic Assumptions
Supply and Demand – Producers and Consumers Reach Agreement     

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