Final answer:
The statement that prices are determined by many buyers and sellers in competitive markets in a market economy is true.
Step-by-step explanation:
The statement 'In a market economy, prices are determined in competitive markets that have many buyers and sellers' is TRUE. A market economy is characterized by minimal government intervention, which allows prices to be set predominantly by the forces of demand and supply. This price system facilitates competition among buyers, who attempt to offer higher prices for a product, and among sellers, who compete by offering lower prices or better quality goods and services.
The free market operates effectively when there are enough competitors to ensure prices reflect the cost of production, and when consumers and producers are knowledgeable about the market. These conditions help to prevent market failures, which can result from insufficient competition, limited information, the inability of resources to move freely, and external costs or benefits not reflected in prices.
In a market economy, prices are not just for goods and services, but also for labor and capital. These prices act as a social mechanism that collects and transmits fiscal information, indicating the supply-demand relationship without direct governmental oversight. Instead, the reactions of consumers and producers to price changes are guided by personal preferences, budget constraints, and profit expectations as part of the demand and supply models.