When prices are determined in a free- market system

Question

Quizplus · Accepted Answer

In a free-market system, prices are determined by the interaction of demand and supply. The price signals sent out by the market coordinate the allocation of resources among different economic activities, without the need for conscious central coordination. As prices fluctuate, businesses and consumers respond by adjusting their behavior and priorities. Therefore, options A and C, which suggest that demand or supply shifts are the primary mechanism for coordinating changes in the economy, are less accurate. Option B, which implies that officials can easily foresee changes in the economy based on price movements, is also not true in a free-market system where prices reflect the collective behavior of a large number of buyers and sellers with different goals and information. Option E is just plain wrong as firms respond to changes in the economy by altering not just the wage rate, but also the prices of goods and services, the quantity and quality of inputs, and so on.

When Prices Are Determined in a Free- Market System