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. This interaction determines market prices and thereby allocates scarce goods and services. 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. 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. Entrepreneurs are people who take the risks of organizing productive resources to make goods and services. Profit is an important incentive that leads entrepreneurs to accept the risks of business failure.