What determines price in a free market economy?

• A. Prices are determined by arbitrary choice.
• B. Prices are determined by government fiat.
• C. Prices are based on historical trends.
• D. Supply and demand determine price.

Answer: (D)

Prices in a free market come from the interaction of buyers and sellers. Demand shows how much people want to buy at different prices, while supply shows how much producers are willing to offer at those prices. The point where these two meet is the equilibrium price, the one at which the quantity demanded equals the quantity supplied. When demand rises or supply falls, prices tend to go up; when supply rises or demand falls, prices tend to go down. Prices act as signals and incentives, guiding resources to their most valued uses and helping balance supply with what people want to buy. Government price setting or relying on past trends doesn’t capture how these market signals actually coordinate decisions in a free market.