Question

How are prices determined differently in a free-market economy versus a command economy?

Option 1: In a command economy, consumers control prices, while in a free-market economy, the government controls prices.
Option 2: In a command economy, manufacturers control prices, while in a free-market economy, consumers control prices.
Option 3: In a command economy, the government controls prices, while in a free-market economy, the market controls prices.
Option 4: In a command economy, the market controls prices, while in a free-market economy, manufacturers control prices.

Answer 1

Prices in a command economy are determined by the government, while in a free-market economy, they are controlled by the interactions of supply and demand within the market. Option 3 accurately states this distinction.

Step-by-step explanation:

Prices in different economic systems are determined by varying entities. In a free-market economy, prices are typically determined by the interactions of supply and demand. Essentially, the consumers and producers negotiate prices based on the willingness to pay and the cost of production. This negotiation happens within the marketplace where various economic actors interact freely to exchange goods and services.

In contrast, a command economy relies on a centralized authority—usually the government—to control the economic affairs of the state. This includes the determination of what goods and services will be produced, how they will be produced, and at what price they will be sold. In such economies, the government often sets the prices for goods and services, aiming to fulfill economic objectives or provide subsidies for necessities such as healthcare and education.

Therefore, the correct option that describes how prices are determined in a free-market economy versus a command economy is Option 3: In a command economy, the government controls prices, while in a free-market economy, the market controls prices.