A market economy is a type of economy wherein the decisions pertaining to production, distribution and investment are made based on demand and supply which are determined by the market. In such an economy, the prices of services and goods are fixed in a free price system. Here, the decisions regarding investments and the allocation of producer goods are chiefly taken by cooperative negotiation via markets. This is unlike in a planned economy, where the production and investment decisions are envisaged in a production plan developed by the State or any other authority that has the control over the economic resources.
In practice, there are not ‘pure’ market economies. There is government regulation to varying degrees in most societies. The market economies can vary from regulated markets to different forms of state-controlled interventionist variants.