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Chapter 3: Problem 7

The price system is based on (LO2) a) government regulation (i.e., the government sets most prices) b) the individual whim of the businessperson who sets it c) the feelings of the individual buyer d) supply and demand

Short Answer

Expert verified
The price system is primarily based on the interaction of supply and demand in a market-based economy, as these factors determine the prices of goods and services. Therefore, the correct answer is (d) supply and demand.

Step by step solution

01

1. Review the given options.

The exercise provides four choices for determining the basis of the price system: a) government regulation b) the individual whim of the businessperson who sets it c) the feelings of the individual buyer d) supply and demand
02

2. Eliminate irrelevant factors.

While government regulation (option a) can sometimes influence price, most free-market systems rely on another factor for determining prices. Options b and c also seem unlikely, as individual whims and feelings don't generally drive the overall price system in a free-market economy.
03

3. Understand the concept of supply and demand.

Supply refers to the quantity of goods or services that are available on the market, and demand refers to the desire of consumers to purchase those goods or services. Prices in a market-based economy are influenced by the interaction of supply and demand. When demand exceeds supply, prices tend to rise; when supply exceeds demand, prices tend to fall.
04

4. Choose the correct option based on the analysis.

Based on the understanding of supply and demand and the elimination of irrelevant factors, it can be concluded that the correct answer is: d) supply and demand The price system is primarily based on supply and demand, as the interaction of these two factors drives prices up or down in a market-based economy.

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