Economics explained
Category:
Economic systems
The Free Market
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The free-market economy
The free market economy is an economy where all economic decisions are taken by individual households and firms and with no government intervention.
Price mechanism
In a free-market economy, decisions on how resources are to be allocated are usually taken by the price mechanism.
The price mechanism determines the production, utilization of resources, and pricing.
This means that the forces of demand and supply determine:
what goods and services will be produced,
how they will be produced
for whom will they be produced
Prices act to indicate the likely market value of particular resources.
The price mechanism works as follows.
Prices respond to shortages and surpluses.
Shortages result in prices rising.
Surpluses result in prices falling.