In a free market economy, wages are determined by

Step 1: Analyze the question The question asks what determines wages in a free market economy. The key phrase is "free market": an economy where prices, including the price of labour (wages), are set by market forces, with little or no government control.

Step 2: Explain the concept In a free market, wages are the price of labour. Like any price, they are set where the demand for labour (from firms/employers) meets the supply of labour (from workers).

• Demand for labour: Employers want more workers when wages are low and fewer when wages are high. Employers' demand slopes downward.
• Supply of labour: More people are willing to work when wages are high and fewer when wages are low. The supply slopes upward.
• Equilibrium wage: The wage at which the quantity of labour demanded equals the quantity supplied.

Step 3: Evaluate the options

• A. The employees: Workers supply labour, but they cannot set wages alone. Eliminate.
• B. The employers: Employers demand labour, but they also cannot set wages alone. Eliminate.
• C. Trade unions: Unions bargain collectively, which is an interference in the free market. Eliminate.
• D. Interaction of demand and supply forces: This is the core principle of a free market. Correct.
• E. The government: Government wage-setting (e.g., a minimum wage) is characteristic of a controlled or mixed economy, not a free market. Eliminate.

Step 4: Answer Wages in a free market economy are determined by the interaction of the forces of demand and supply for labour.

Tip: In any "free market" question about prices (goods, labour, or money), the answer is almost always the forces of demand and supply. Options naming a single party (employer, employee, government, union) are usually distractors, because the market is the interaction of both sides.