Friedman was seen as the leader of the Chicago school of monetarism
Mr Friedman died in San Francisco, a spokesman for his family said. The cause of death is not yet known.
Mr Friedman, who popularised the phrase "there's no such thing as a free lunch", was awarded the Nobel Prize for economics in 1976.
Known as the high priest of monetarism, his ideas gained popularity in the 1980s when they influenced the policies of Margaret Thatcher and Ronald Reagan.
'Intellectual'
The leaders were won over by Mr Friedman's idea that the supply of money was the key factor in determining economic growth and the rate of inflation.
Lady Thatcher paid tribute to Mr Friedman, calling him "an intellectual freedom fighter".
"He revived the economics of liberty, when it had been all but forgotten," she said.
"Never was there a less dismal practitioner of the dismal science. I shall greatly miss my old friend's lucid wisdom and mordant humour."
America has lost a true visionary and advocate for human freedom
Gordon St Angelo, Friedman Institute
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And Chancellor Gordon Brown described Mr Friedman as "one of the great economic theorists" of the 20th century.
"He had a major influence on post-war economic policy not least in establishing the importance of credibility in monetary policy making," he said.
'Visionary'
Mr Friedman was also a key advocate of deregulation and privatisation.
Throughout his more than 30 years as Professor of Economics at the University of Chicago, Mr Friedman was a champion of the free market, and his approach became known as the "Chicago School."
He was also viewed as an accomplished and fluent speaker who, it was said, had never lost an argument.
"America has lost a true visionary and advocate for human freedom. And I have lost a great friend," said Gordon St Angelo, president of the Friedman Foundation.
Mr St Angelo added that Mr Friedman had been a highly influential figure who had "transformed the minds of US Presidents, world leaders, entrepreneurs and freshmen economic majors alike".
The Cato Institute - a free market think tank in Washington that Mr Friedman advised - added that Mr Friedman had "revolutionised" economic thinking.
"If (John Maynard) Keynes dominated economic thinking in the mid-20th century, Friedman dominates economic thinking at the end of the century, and well into this century," an institute spokesman told AFP news agency.
And Ben Bernanke, the head of the US central bank, the Federal Reserve, said in a speech in 2003 that "his thinking has so permeated modern macroeconomics that the worst pitfall in reading him today is to fail to appreciate the originality and even revolutionary character of his ideas."
Libertarian
Friedman was born on 31 July 1912, in Brooklyn, New York, the son of Jewish immigrants, and worked his way through university.
During his lifetime he also advised US Presidents Reagan and Nixon and was also a prolific writer.
His books included A Theory of the Consumption Function, Tyranny of the Status Quo and Free To Choose - the two later titles accompanied TV series of the same name.
However, his work was not just limited to the economic realm. He was also a libertarian campaigner who supported home schooling as well as the decriminalisation of drugs and prostitution.
As part of his campaigning Mr Friedman advocated the abolition of the military draft in the US after the Vietnam War, something he said was one of his proudest achievements.
Nobel laureate Milton Friedman has died at the age of 94, his family announced. Friedman is considered to be one the most influential economists of the past century.

Friedman won the Nobel Prize in Economics in 1976 and essentially defined the theory of Monetarism. He served on U.S. President Reagan's Economic Policy Advisory Board and significantly influenced post-WWII economic policy in the U.S.

He was a leading figure in the Chicago school of economics.