A market economy (also called a free market economy) is a system where private individuals and businesses make economic decisions through voluntary exchange. Prices are set by supply and demand, not by the government. The profit motive drives production and innovation.
Adam Smith described this as the "invisible hand" — millions of individuals pursuing their self-interest inadvertently create outcomes that benefit society. A baker does not make bread out of kindness; they do it to earn a living. But the result is that everyone gets bread.
No pure market economy exists — even the US and Hong Kong (often cited as the freest markets) have regulations, taxes, and government spending. The key advantages: efficiency, innovation, consumer choice, and economic growth. The downsides: income inequality, monopoly formation, environmental damage, and periodic recessions without government intervention.