How does resources are allocated in free market economy?

Answer 1

Resources, in a free market, are allocated by buyers and sellers. Buyers determine the quantity determined by their willingness and ability to pay for the products. Prices are determined by supply and demand.

Answer 2

In a Free Market, prices act as signals for both consumers and producers. On the part of consumers, when the price of a good rises relative to other goods, it signals to consumers that they must ration the use of the good purchased. In other words, they must treat each good used more dearly because the purchase of that good accrues a higher opportunity cost. Producers produce more goods when price rises because there is a greater potential for revenues to be accrued.

In short, the Free Market leads to an efficient allocation of resources because prices are continually fluctuating, demonstrating scarcity and surplus through the actions of millions of individuals.