National Evaluation Series (NES) Business Studies Practice Test

In which type of economy are prices of goods and services most influenced by fluctuations in supply and demand?

1. Command economy

2. Mixed economy

3. Free market economy

4. Socialist economy

The correct answer is: Free market economy

In a free market economy, prices of goods and services are primarily determined by the forces of supply and demand without substantial intervention from the government. This means that when demand for a product increases and supply remains the same, the price tends to rise. Conversely, if supply exceeds demand, the price typically drops. This system allows for flexibility and responsiveness to consumer needs and preferences, as businesses adjust their production based on market signals. In contrast, a command economy relies on central planning, where the government dictates prices and production levels, minimizing the effects of supply and demand fluctuations. A mixed economy combines elements of both free market and command economies, leading to some government intervention, but it does not operate entirely based on supply and demand like a free market economy. A socialist economy often emphasizes equitable distribution and may have substantial government control over production and pricing, thus further reducing the direct influence of supply and demand on prices.