Florida Teacher Certification Examinations (FTCE) Social Science Practice Test

Which statement describes a characteristic of a market economy?

1. Prices are set by a central authority

2. Government controls all means of production

3. Supply and demand determine prices

4. Trade is restricted by tariffs

The correct answer is: Supply and demand determine prices

A market economy is fundamentally characterized by the interplay of supply and demand to determine prices of goods and services. In this system, individual consumers and producers make decisions based on their personal interests, which collectively influence the market. When consumer demand for a product increases, prices typically rise, encouraging producers to supply more of that product. Conversely, if supply exceeds demand, prices tend to fall, which may lead producers to reduce output. This self-regulating mechanism allows for efficient allocation of resources within the economy, as it responds dynamically to changes in consumer preferences and market conditions. The other options describe features that are not typical of a market economy. For instance, a central authority setting prices, government control over all means of production, and trade restrictions through tariffs are more aligned with command economies or mixed economies, where government intervention plays a significant role in economic decision-making.