In what economic system are production and prices determined by supply and demand?

The correct answer is a market economy, which is characterized by the principles of supply and demand driving the production of goods and services as well as their prices. In this system, consumers and producers interact in the marketplace, and their choices influence what is offered and at what cost. For example, if there is a high demand for a particular product, prices may rise, prompting producers to create more of that product. Conversely, if demand decreases, prices may drop, leading to a reduction in production.

Other economic systems differ significantly in their approach. A command economy relies on centralized government planning to determine what and how much to produce, with little to no input from market forces. A socialist economy may involve varying degrees of collective or governmental ownership and control, but it does not exclusively rely on supply and demand to dictate production and pricing. A planned economy similarly emphasizes government intervention and may not allow for the price-setting mechanisms found in a market economy. Thus, the defining characteristic of a market economy is the reliance on supply and demand to facilitate economic activity.