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A free market economy is one where scarcities are resolved through changes in relative prices rather than through regulation.

If a commodity is in short supply relative to the number of people who want to buy it, its price will rise, producers and sellers will make higher profits and production will tend to rise to meet the excess demand.

If the available supply of a commodity is in a glut situation, the price will tend to fall, thereby attracting additional buyers and discouraging producers and sellers from entering the market. In a free market, buyers and sellers come together voluntarily to decide on what products to produce and sell and buy, and how resources such as labour and capital should be used.

A free market can be contrasted with a controlled market, where prices are determined by a regulatory or administrative authority and do not respond flexibly in the face of varying demand and supply conditions. Controlled markets are characterized by rationing if production falls short of demand, or a buildup of unsold stocks if production exceeds demand.

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