This interaction determines market prices and thereby allocates scarce goods and services. Prices send signals and provide incentives to buyers and sellers. When supply or demand changes, market prices adjust, affecting incentives. Competition among sellers lowers costs and prices, and encourages producers to produce more of what consumers are willing and able to buy. Competition among buyers increases prices and allocates goods and services to those people who are willing and able to pay the most for them.
Institutions evolve in market economies to help individuals and groups accomplish their goals.
A different kind of institution, clearly defined and enforced property rights, is essential to a market economy. Money makes it easier to trade, borrow, save, invest, and compare the value of goods and services. Interest rates, adjusted for inflation, rise and fall to balance the amount saved with the amount borrowed, which affects the allocation of scarce resources between present and future uses. Income for most people is determined by the market value of the productive resources they sell. What workers earn depends, primarily, on the market value of what they produce and how productive they are.