How does supply and demand affect prices in a free enterprise system?

How does supply and demand affect prices in a free enterprise system?

• A. Prices remain fixed regardless of demand or supply changes
• B. Prices fluctuate based on consumer demand for goods and services and the availability of those goods and services
• C. Prices are solely determined by the government
• D. Prices are set according to production costs only

Answer: (B)

In a free enterprise system, prices are influenced by the fundamental economic principles of supply and demand. When consumer demand for goods and services rises, and the supply remains constant or is limited, prices tend to increase. This is because consumers are willing to pay more to obtain the items they want, which signals producers to increase production or seek ways to meet the heightened demand.

Conversely, if there is a surplus of a product—meaning the supply exceeds consumer demand—prices will typically drop as sellers try to attract buyers. This dynamic interaction between demand and supply leads to fluctuating prices as the market adjusts to changing conditions. Thus, B accurately describes this market behavior, illustrating how consumer preferences and the availability of products directly impact pricing structures.

In contrast, prices remaining fixed regardless of demand or supply changes does not account for the elasticity of the market. Government determination of prices ignores the role of consumer choice and market competition. Lastly, setting prices solely according to production costs overlooks the influence of market demand and pricing strategies employed by businesses.