In basic economic terminology, a market economy is best described as an economy that is primarily characterised by which of the following features?

Introduction / Context:
Economies can be classified according to how economic decisions are made and who controls the factors of production. A market economy is a central concept in introductory economics, contrasted with centrally planned and mixed economies. This question asks you to recall the core defining feature of a market economy, not every influence that might affect such an economy in practice.

Given Data / Assumptions:

• We are classifying an economic system based on decision making and control.
• In a market economy, prices, output, and resource allocation are determined by market forces.
• The role of the Government is limited compared with a centrally planned system.
• International market forces may influence the economy, but they do not define its basic nature.

Concept / Approach:
A pure market economy is one in which economic decisions regarding production, consumption, and distribution are guided mainly by the price mechanism. Individual consumers and firms interact in markets, and prices adjust according to demand and supply. Government intervention is minimal and generally restricted to enforcing contracts, protecting property rights, and addressing market failures. While international forces such as trade and capital flows can influence a market economy, the defining feature is internal reliance on markets rather than direct state control. In exam questions, the most accurate brief description focuses on freedom from direct Government control and dependence on demand and supply conditions.

Step-by-Step Solution:
Step 1: Identify that the term “market economy” refers to an economy driven by market forces rather than central planning. Step 2: Recall that in such an economy, prices, production, and consumption decisions are mainly determined by demand and supply. Step 3: Note that Government intervention is limited and usually does not involve detailed control over what, how, and for whom to produce. Step 4: Compare the options and select the one that emphasizes freedom from direct Government control and reliance on the price mechanism. Step 5: Reject options that either describe the opposite situation or add unnecessary statements that are not defining characteristics.

Verification / Alternative check:
You can verify this by contrasting a market economy with a centrally planned or command economy. In a centrally planned economy, the Government decides output targets, resource allocation, and prices through a central plan. This is the opposite of a market economy. A mixed economy, like India, combines elements of both market and planning. Therefore, any option that suggests Government control as the primary feature cannot be the correct definition of a market economy. The core idea is freedom of choice and decentralized decision making guided by the price system.

Why Other Options Are Wrong:
It is largely controlled and directed by the Government through central planning: This describes a planned or command economy, not a market economy.
It is strongly influenced only by international market forces rather than domestic demand and supply: International forces may affect a market economy but are not the defining feature; domestic markets and prices are central.
All of these accurately describe a market economy: Since the first option clearly contradicts the idea of a market economy, stating that all are correct cannot be right.

Common Pitfalls:
Learners sometimes confuse a market economy with an open economy and assume that any reference to international forces must be central to the definition. Another pitfall is thinking that all economies today are “mixed” and then forgetting the textbook definition of a pure market economy used in exam questions. It is important to focus on the main contrast: market economies rely on voluntary exchange and the price mechanism, while centrally planned economies rely on Government directives.

Final Answer:
A market economy is best described as one that operates mainly through the price mechanism and is largely free from direct Government control.