What Is a Free Market Economy?

Malcolm Tatum
Malcolm Tatum

A free market economy is a type of economic system in which supply and demand drive the forward movement of the economy with a minimum of involvement on the part of a government. The most extreme free price system would allow for completely open interactions between consumers and sellers that are completely based on a mutual agreement regarding price, with no form of governmental intervention at all. While this extreme type of free market economy is not generally considered to exist today, there are a number of nations that provide a setting for supply and demand to drive the market economy with only a minimum amount of governmental influence in the form of restrictions and taxes involved.

Sellers will often decrease prices of surplus goods to attract more buyers.
Sellers will often decrease prices of surplus goods to attract more buyers.

There are several aspects that make a free market economy unique in comparison to other types of market economies. Buyers and sellers are free to enter into transactions when and as they choose. The terms of those transactions are determined by the wants and needs of both parties, with the terms crafted in a manner that is to the mutual benefit of both. In a free market economy, a business has the ability to offer discounted pricing for volume purchases or to maintain standard pricing regardless of the volume of goods or services ordered. Within this type of economic setting, as long as the terms of the transaction do not violate any minimal governmental trade regulations that may apply or involve any other breach of law, the two parties are free to negotiate and come to their own terms.

In a free market economy, the pricing for goods and services will be set by the changes in supply and demand. For example, if there is a surplus of goods in the marketplace and the demand is not sufficient to offset that supply, sellers will often decrease the price in hopes of attracting more buyers. At the same time, if the demand for a product greatly outpaces the current supply, sellers may increase the cost per unit in order to take advantage of that demand for as long as it lasts. Since demand can be affected by a number of factors, such as personal tastes, advances in technology and even the loss of household income, this means that in a free market economy, prices are always subject to change.

Many nations around the world combine elements of a free market economy with other forms of strategies, depending on the specific situations existing in those countries. For example, nations with a significantly poorer citizenry may choose to implement subsidies and other restrictions on the prices for certain goods as a means of ensuring access to those goods by a greater number of residents. At the same time, there may be no restrictions on trade, price or any other aspect of transactions between buyers and sellers, effectively creating a mixed market economy.

Malcolm Tatum
Malcolm Tatum

After many years in the teleconferencing industry, Michael decided to embrace his passion for trivia, research, and writing by becoming a full-time freelance writer. Since then, he has contributed articles to a variety of print and online publications, including wiseGEEK, and his work has also appeared in poetry collections, devotional anthologies, and several newspapers. Malcolm’s other interests include collecting vinyl records, minor league baseball, and cycling.

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Discussion Comments


Compared to the US and some other countries like Canada and Australia, European countries have a less free market economy. I saw an article in the paper that said so. Does anyone know why?

Is it because the governments of European countries are more socialist?


@SarahGen-- It's possible but not desirable because if there is no government intervention in a market economy, one or two firms will start to dominate each industry, pushing other, small firms out. There has to be some healthy competition in order for the economy to grow and for consumers to afford goods. In order prevent a few elites from ruling the economy, the government has to regulate certain aspects.

Government regulation also protects the national economy from foreign firms that may damage an industry that's important for a country.

This is why a mixed market economy is best. A mixed market economy is a free market economy with some regulation in certain areas.

Why is it not possible to have a free market economy without any government intervention?
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