None of us can produce everything we need and want. Markets exist so that people can exchange the things they have for the things they want. A market is an arrangement that allows buyers and sellers to exchange goods and services.

     Markets function because of self-interest and competition. Self-interest means buyers and sellers are focused on personal gain. It motivates consumers to buy the goods and services they want at the lowest prices possible. Competition is the struggle among producers for the dollars of consumers. It keeps prices low as firms attempt to make their prices attractive to consumers. Together, self-interest and competition work to regulate the marketplace.

     The factor market and the product market are the two main parts of the free market. In the factor market, firms purchase land, labor, and capital—the factors of production— from households. Firms rent land, hire workers, and borrow money from investors. In the product market, households purchase goods and services produced by firms.

     The free market helps an economy meet many economic goals. It encourages efficiency, economic freedom, and innovation and growth. However, two other economic goals—security and equity—are difficult to achieve in a pure market system. Many societies have modified the free market to better meet their goals.