In a free market economy, resources are allocated through the

Step 1: Analyze the question The question asks how resources are allocated in a free market economy. In other words: who or what decides what to produce, how to produce it, and for whom?

Step 2: Explain the concept In a free market (capitalist) economy:

• Resources are privately owned.
• Decisions are made by individual consumers and producers.
• Demand and supply interact to set prices.
• These prices signal where resources should go. High prices attract producers to supply more, and low prices tell them to cut back.

This system is called the price mechanism (or "invisible hand"). It is the main allocator of resources.

By contrast, in a command (centrally planned) economy, the government or a state planning committee decides how resources are allocated.

Step 3: Evaluate the options

• A. Government department: This is typical of a command or planned economy, not a free market.
• B. Price mechanisms: Correct. Prices determined by demand and supply allocate resources.
• C. Trade union: Trade unions protect workers' interests and do not allocate resources in an economy.
• D. State planning committee: This is typical of a command economy such as the former Soviet Union.

Step 4: Answer The correct answer is **B.

Exam tip: Link each economic system to its allocator:

• Free market → price mechanism
• Command economy → government/state planning
• Mixed economy → both

If you see "free market," "capitalist," or "market economy," think price mechanism.