Voluntary exchange occurs only when all participating parties expect to gain. This is true for trade among individuals or organizations within a nation, and usually among individuals or organizations in different nations. When individuals, regions, and nations specialize in what they can produce at the lowest cost and then trade with others, both production and consumption increase. Markets exist when buyers and sellers interact. 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.