Which of the following best describes how a competitive market determines the price of a good?

• A. The price is determined solely by the government.
• B. The price is set by the interaction of supply and demand.
• C. The price is fixed by the producers.
• D. The price is chosen randomly by consumers.

Answer: (B)

Verified step by step guidance

1. Understand that in a competitive market, the price of a good is not set by any single entity such as the government or producers alone, nor is it random.
2. Recall the fundamental economic principle that prices in competitive markets are determined by the interaction of supply and demand.
3. Recognize that the supply curve represents how much producers are willing to sell at different prices, while the demand curve represents how much consumers are willing to buy at different prices.
4. Identify the market equilibrium price as the price at which the quantity supplied equals the quantity demanded, meaning the market clears with no surplus or shortage.
5. Conclude that this equilibrium price is the result of the natural interaction between buyers and sellers in the market, not imposed externally or chosen arbitrarily.