Question

In a capitalist economy, economic decision-making happens through price mechanisms. Which of the following statements is true regarding price mechanism?

• A. It refers to the intervention of the government in the economic decision-making of the country.
• B. It refers to the system where the forces of demand and supply determine the prices of commodities and the changes therein.
• C. It refers to the proactive role played by the central bank of the country in case of instability in the market in the presence of private companies.
• D. It refers to the centralised plan of the government formulated to retain control over market forces.

Answer 1

The correct option is B It refers to the system where the forces of demand and supply determine the prices of commodities and the changes therein.

In a capitalist economic system, economic decision-making happens through price mechanisms as determined by markets. Price mechanism refers to the system where the forces of demand and supply determine the prices of commodities and the changes therein. So, it is the buyers and sellers who actually determine the price of a commodity.