Which statement best describes how a market economy allocates resources compared to a planned economy?

• A. A market economy relies on government planning; a planned economy relies on entrepreneurs.
• B. A market economy operates without prices; a planned economy uses prices.
• C. A market economy ignores resource allocation; a planned economy uses markets.
• D. A market economy allocates resources via supply and demand and price signals; a planned economy uses centralized government decisions to allocate resources.

Answer: (D)

Resources in a market economy are guided by price signals that come from supply and demand. When prices rise, production shifts toward those goods, and when they fall, production shifts away, so resources move to where they’re valued most. In contrast, a planned economy relies on centralized government decisions to determine what to produce and how to allocate resources, rather than letting prices coordinate choices. So the best description is that a market economy allocates resources via supply and demand and price signals, while a planned economy uses centralized government decisions. The other statements misrepresent how prices and planning operate, which is why they’re not correct.