In a market economy, buyers start demanding much less of a certain good than before. What is likely to follow?
Answer & explanation
Correct answer: option 4
The correct answer is Option (4) → Its price falls, which signals to producers that society wants less of it, so they are likely to reduce its production.
In a market, the price of a good reflects society’s valuation of it. When buyers want much less of it, its price falls. The lower price tells producers that society wants less, so they are likely to produce less.
Option (1) Its price stays the same, because the price of a good is fixed by its producers alone. — Incorrect. A market price is agreed between buyers and sellers, so it changes when demand changes.
Option (2) Its price rises, which signals to producers that society wants more of it, so they are likely to raise its production. — Incorrect. A price rise follows more demand. Here demand has fallen.
Option (3) The central authority decides how much less of the good is to be produced and who will get it. — Incorrect. In a market economy, price signals settle how much to produce; there is no central authority deciding it.
Option (4) Its price falls, which signals to producers that society wants less of it, so they are likely to reduce its production. — Correct. The fall in price signals producers to cut output.
NCERT (2026-27): “1.3.2 The Market Economy In a market system, all goods or services come with a price (which is mutually agreed upon by the buyers and sellers) at which the exchanges take place. The price reflects, on an average, the society’s valuation of the good or service in question. If the buyers demand more of a certain good, the price of that good will rise. This signals to the producers of that good that the society as a whole wants more of that good than is currently being produced and the producers of the good, in their turn, are likely to increase their production. In this way, prices of goods and services send important information to all the individuals across the market and help achieve coordination in a market system. …” |