Multiple Choice
In perfectly competitive markets, why do individual firms face horizontal (perfectly elastic) demand curves?
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3. The Market Forces of Supply and Demand
Competitive Markets
Multiple Choice
Which of the following is an important feature of a market economy?
A
Central planning sets production targets
B
Prices are determined by supply and demand
C
Resources are allocated by government decree
D
Firms are owned and operated by the state
Verified step by step guidance1
Understand the definition of a market economy: it is an economic system where decisions about production, investment, and distribution are guided by the price signals created by supply and demand.
Recognize that in a market economy, prices are not set by a central authority or government decree but emerge from the interaction of buyers and sellers in the marketplace.
Identify that central planning and government ownership of firms are characteristics of a command or planned economy, not a market economy.
Recall that resource allocation in a market economy is decentralized, meaning individual consumers and firms make decisions based on their own interests and market prices.
Conclude that the key feature distinguishing a market economy is that prices are determined by supply and demand, which coordinate economic activity efficiently.
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