How do supply and demand interact to determine the price of a good in a market economy?

How do supply and demand interact to determine the price of a good in a market economy?

• A. Prices are fixed by government regulation.
• B. Prices rise when supply exceeds demand and fall when demand exceeds supply.
• C. Prices are determined by the average costs of production.
• D. Prices rise when demand exceeds supply and fall when supply exceeds demand.

Answer: (D)

In a market economy, prices move based on how much people want a good and how much is available. When demand is high and supply is low, there aren’t enough goods for all the buyers, so the price rises. When supply is high and demand is low, there are more goods than buyers want, so the price falls. This pattern shows that prices rise when demand exceeds supply and fall when supply exceeds demand. Government controls or production costs aren’t what set the general price in a free market, and the opposite relationship would not correctly describe how prices adjust.

In a market economy, prices move based on how much people want a good and how much is available. When demand is high and supply is low, there aren’t enough goods for all the buyers, so the price rises. When supply is high and demand is low, there are more goods than buyers want, so the price falls. This pattern shows that prices rise when demand exceeds supply and fall when supply exceeds demand. Government controls or production costs aren’t what set the general price in a free market, and the opposite relationship would not correctly describe how prices adjust.