The efficient working of a free market economy requires that the producer firms must have incentives to work hard and produce goods and services at the lowest possible cost per unit of output Market economies provide incentives to the firms and individuals by recognising and enforcing the property rights of the individuals and firms to own the resources and goods and services produced by using them.
It also allows the individuals and firms to use the resources owned by them for making profits. Earning of profits from using resources owned by them also provides incentives to the firms and individuals to produce goods and services efficiently.
Profits depend on cost per unit incurred and price charged of goods and services produced. The prices of goods and resources provide information to the individuals and firms about the relative scarcity of different goods and services. Thus property rights, profits, prices and incentives play a crucial role in the functioning of a market economy.