A market economy is an economic system where prices, production, and distribution of goods and services are determined primarily by supply and demand rather than by central planning. The key characteristics that define this system are: private ownership of resources and businesses, where individuals and companies own capital and property; voluntary exchange, where buyers and sellers freely negotiate transactions without coercion; price mechanism, where prices serve as signals that coordinate economic activity and allocate resources efficiently; competition, which encourages innovation and efficiency as firms compete for customers; consumer sovereignty, meaning consumer preferences drive production decisions; profit motive, where businesses aim to maximize returns on investment; and limited government intervention, though most modern market economies include some regulations to prevent monopolies, protect workers, and address market failures. Additionally, market economies rely on self-interest as a driving force—Adam Smith's concept that individuals pursuing their own interests inadvertently benefit society through increased productivity and innovation. These characteristics work together to create a decentralized decision-making system where millions of independent choices aggregate into an overall economic outcome. Real-world economies typically blend market mechanisms with some degree of government involvement, creating mixed economies rather than pure market systems.