The working of the price mechanism in a free-market economy refers to

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

The interplay of the forces of demand and supply
Determination of the inflation rate in the economy
Determination of the economy's propensity to consume
Determination of the economy's full employment output
This question was previously asked in
UPSC CDS-2 – 2019
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In a free-market economy, the price mechanism is the system where the forces of supply and demand determine the prices of goods and services and coordinate the allocation of resources. Prices act as signals, communicating information between buyers and sellers.
The price mechanism is a fundamental concept in microeconomics, explaining how markets tend towards equilibrium without central planning.
The interplay of demand and supply directly leads to price determination. Changes in demand or supply cause prices to adjust, signaling producers to increase or decrease output and consumers to alter their consumption choices. Options B, C, and D describe macroeconomic outcomes or behavioral tendencies that are influenced by, but are not the definition of, the price mechanism itself.

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