What does the term 'market economy' refer to in the context of capitalism?

The term 'market economy' refers to a system driven by private ownership and market forces, which is a fundamental characteristic of capitalism. In a market economy, decisions regarding investment, production, and distribution are primarily determined by the supply and demand dynamics of the marketplace. Individuals and businesses operate for profit, and prices are influenced by consumers' willingness to pay and producers' costs, allowing for competition and innovation.

This approach encourages efficiency as producers respond to consumer preferences and market signals. The emphasis is on voluntary exchanges, where individuals engage in trade without coercive state intervention. Therefore, the essence of a market economy lies in its reliance on decentralized decision-making, which is characteristic of capitalist systems.