The following passage refers to the operation of a free-market economy. Delete the words (in italics)...

The following passage refers to the operation of a free-market economy. Delete the words (in italics) which are incorrect.

In a totally free-market economy, the quantities of each type of good that are bought and sold, and the amounts of factors of production (labour, land and capital) that are used, are determined by the decisions of individual households and firms through the interaction of demand and supply.

In goods markets, households are demanders and firms are suppliers. In labour markets, households are suppliers and firms are demanders.

Demand and supply are brought into balance by the effects of changes in price. If supply exceeds demand in any market (a surplus), the price will fall. This will lead to a rise in the quantity demanded but a fall in the quantity supplied. If, however, demand exceeds supply in any market (a shortage), the price will rise. This will lead to a fall in the quantity demanded and a rise in the quantity supplied. In either case, the adjustment of price will ensure that demand and supply are brought into equilibrium, with any shortage or surplus being eliminated.

Expert Solution

In a totally free-market economy, the quantities of each type of good that are bought and sold, and the amounts of factors of production (labour, land and capital) that are used, are determined by the decisions of individual households and firms through the interaction of demand and supply.

In goods markets, households are demanders and firms are suppliers. In labour markets, households are suppliers and firms are demanders.

Demand and supply are brought into balance by the effects of changes in price. If supply exceeds demand in any market (a surplus), the price will fall. This will lead to a rise in the quantity demanded but a fall in the quantity supplied. If, however, demand exceeds supply in any market (a shortage), the price will rise. This will lead to a fall in the quantity demanded and a rise in the quantity supplied. In either case, the adjustment of price will ensure that demand and supply are brought into equilibrium, with any shortage or surplus being eliminated.

The passage seems absolutely correct and there are no mistakes(no words in italics).

The adjustment mechanism of the equilibrium point in a free market economy can be seen from the graph above.

Rahul Sunny answered 9 months ago

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