Which of the following best describes what occurs in the product market in a competitive market?

• A. Firms sell goods and services to households, and prices are determined by supply and demand.
• B. Households buy stocks and bonds from firms, and returns are guaranteed.
• C. Firms purchase raw materials from households, and prices are fixed by producers.
• D. Households sell labor to firms, and wages are set by government regulation.

Answer: (A)

Verified step by step guidance

1. Understand the definition of the product market: it is the market where final goods and services are bought and sold between firms and households.
2. Recall that in a competitive product market, firms are sellers offering goods and services, while households are buyers demanding these goods and services.
3. Recognize that prices in a competitive product market are determined by the interaction of supply (from firms) and demand (from households), not fixed or regulated by external forces.
4. Identify that other options describe different markets or incorrect mechanisms, such as financial markets (stocks and bonds), factor markets (labor), or incorrect price-setting methods.
5. Conclude that the best description is: firms sell goods and services to households, and prices are determined by supply and demand.