What Is a Free Market Economy AP World History?

A free market economy is an economic system where the prices of goods and services are determined by supply and demand. This means that individuals and businesses can freely produce and sell goods and services without interference from the government. Free market economies rely on the principles of capitalism, which emphasizes private ownership, competition, and profit.

The Origins of Free Market Economies

The concept of a free market economy dates back to the 18th century, when economists such as Adam Smith and David Ricardo argued that markets could regulate themselves without government intervention. They believed that if individuals were left to pursue their own self-interests in a competitive market, they would naturally produce goods and services that met consumer demand at the lowest possible cost.

Characteristics of Free Market Economies

One of the key characteristics of a free market economy is private property rights. This means that individuals have the right to own property, including land, buildings, and equipment. They also have the right to use their property as they see fit, whether that means using it for personal or commercial purposes.

Another characteristic of a free market economy is competition. In a competitive market, businesses must continually innovate and improve their products in order to attract customers away from their competitors. This drives down prices while increasing quality, benefiting consumers.

The Pros and Cons of Free Market Economies

Advocates of free market economies argue that they promote economic growth by allowing businesses to innovate and create new products. They also argue that free markets allocate resources more efficiently than government-controlled economies because prices reflect supply and demand.

However, critics argue that free markets can lead to income inequality because some individuals or businesses may be more successful than others. Additionally, some argue that free markets can fail to account for externalities such as pollution or other negative effects on society.


In conclusion, a free market economy is an economic system where the prices of goods and services are determined by supply and demand. While there are advantages to this system, such as promoting innovation and efficiency, there are also disadvantages, such as potential income inequality. It is important for societies to carefully consider the pros and cons of free market economies when designing their economic systems.