Which statement best describes price determination in a free market?

• A. Prices set by the government
• B. Central planning
• C. Prices determined by supply and demand
• D. Quotas for distribution

Answer: (C)

Prices in a free market emerge from the interaction of buyers and sellers—the forces of supply and demand. When demand is high and supply is limited, prices rise; when supply is abundant or demand is weak, prices fall. The resulting price, called equilibrium, balances the amount producers want to sell with the amount consumers want to buy, and it also signals producers to adjust in the future. This contrasts with systems where the government sets prices, or central planners decide production levels, or quotas control distribution. In a free market, price is determined by how much people are willing to pay versus how much is available.