The working of the price mech- anism in a free-market economy refers to which one of the following ?

In a free-market economy, the price mechanism refers to the process by which prices for goods and services are determined through the interaction of buyers and sellers. This process is fundamentally driven by the interplay of the forces of demand and supply [5]. Market equilibrium is reached at the point where the quantity demanded by consumers equals the quantity supplied by producers, effectively setting the market price [5]. The price mechanism serves as a signaling system that allocates resources efficiently without central planning. While macroeconomic factors like inflation or full employment are related to the broader economy, the core 'working' of the price mechanism specifically describes how individual prices adjust to clear markets based on consumer preferences and producer costs [5]. Thus, the determination of prices through supply and demand shifts is the defining characteristic of this mechanism [5].

Sources

1. [1] Microeconomics (NCERT class XII 2025 ed.) > Chapter 5: Market Equilibrium > 5.2.2 Price Floor > p. 86
2. [3] Microeconomics (NCERT class XII 2025 ed.) > Chapter 5: Market Equilibrium > Market Equilibrium > p. 71
3. [5] https://www.investopedia.com/terms/t/theory-of-price.asp
4. [2] Microeconomics (NCERT class XII 2025 ed.) > Chapter 5: Market Equilibrium > 5.2.2 Price Floor > p. 85