In a market economy, what happens when the price of a good rises due to greater demand?

• A. Reduce production to save resources.
• B. Ignore the market and fix prices.
• C. Increase production to meet demand.
• D. Eliminate the good from the market.

Answer: (C)

In a market economy, price signals guide production decisions. When demand for a good rises, buyers are willing to pay more, so the price increases. That higher price makes producing the good more profitable, encouraging firms to expand output, hire more resources, and shift production toward that good. As supply responds to the higher price, it grows to meet the increased demand, helping move the market back toward balance over time.

Choosing to reduce production would cut profits and go against the incentive created by a higher price. Fixing prices ignores how the market naturally allocates resources, and eliminating the good would only make sense if there were no demand—not when demand is rising.