In a perfectly competitive market, prices are determined by what forces?

• A. Government regulation
• B. Supply and demand
• C. Producer choice
• D. Consumer preferences

Answer: (B)

In a perfectly competitive market, prices are set by the interaction of the market’s supply and demand. The overall supply curve, driven by production costs and technology, and the demand curve, driven by consumer preferences and income, determine a unique equilibrium price where the quantity supplied equals the quantity demanded. Individual producers are price takers and can’t influence the price themselves, so the price reflects the forces of the entire market, not any single actor.

Government regulation can alter prices in some settings, but under perfect competition the price emerges from the market-clearing intersection of supply and demand. Consumer preferences shape demand, and producers’ costs shape supply, but the actual price is the equilibrium that results from their combined pressures.