In which of the following economies are economic decisions taken only on the basis of the price mechanism?
Answer & explanation
Correct answer: option 3
The correct answer is Option (3) → Market economy
In a market economy, all economic activities are organised through the market. Prices agreed by buyers and sellers send signals, and these signals decide what and how much is produced.
Option (1) Centrally planned economy — Incorrect. Here the government or a central authority plans all the important activities, so decisions do not rest on prices.
Option (2) Mixed economy — Incorrect. Here some important decisions are taken by the government, while the rest go through the market. So prices are not the only basis.
Option (3) Market economy — Correct. All activities go through the market, and the price signals bring about coordination.
NCERT (2026-27): “1.3.2 The Market Economy In contrast to a centrally planned economy, in a market economy, all economic activities are organised through the market. A market, as studied in economics, is an institution which organises the free interaction of individuals pursuing their respective economic activities. …” “… 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. Thus, in a market system, the central problems regarding how much and what to produce are solved through the coordination of economic activities brought about by the price signals.” “In reality, all economies are mixed economies where some important decisions are taken by the government and the economic activities are by and large conducted through the market. The only difference is in terms of the extent of the role of the government in deciding the course of economic activities. …” |