Final answer:
A true market economy operates on the principles of demand and supply with no governmental intervention, allowing market competition to dictate prices and resource allocation.
Step-by-step explanation:
A true market economy operates based on a system where the forces of demand and supply dictate how resources are allocated and products are priced. There is no government intervention in this economic model, and the prices are determined by the consumers' willingness to pay and the producers' willingness to accept a certain price. This environment of pure competition fosters efficiency and innovation as businesses strive to meet the consumers' needs better than their competitors.
In order for a free market economy to function optimally, certain conditions must be met, including adequate competition, well-informed buyers and sellers, mobility of resources, and prices that reflect the actual production costs. When these conditions are satisfied, the market can effectively answer the basic economic questions of what, how, and for whom to produce. An example of this in action is the New York Stock Exchange, where the interaction of buyers and sellers determines the prices of stocks without any central authority.