In a market economy, what primarily determines the prices of goods and services?

• A. Supply and demand
• B. Advertising
• C. Government policy
• D. Production costs only

Answer: (C)

Prices in a market economy are set by the interaction of buyers and sellers. The quantity a consumer wants to buy at a given price, and the price a producer is willing to accept to supply a good, create two curves: demand and supply. The point where these two curves meet is the equilibrium price, the price that balances how much is bought and sold in the market. If demand grows or supply shrinks, prices tend to rise; if demand falls or supply grows, prices tend to fall. Advertising can influence demand by changing consumer preferences, and production costs affect the cost side of supply, shifting the supply curve. Government policy can also affect prices through taxes, subsidies, or controls, but the fundamental driver of prices in a market is the ongoing interaction of supply and demand.