In a market economy, resources are allocated by:

Correct option is C

The correct answer is (C) Prices

Explanation:
• In a market economy (also known as a capitalist economy), the 'Price Mechanism' is the fundamental system for resource allocation.
• Prices act as signals to both producers and consumers. If the price of a good rises, it signals producers to allocate more resources to its production.
• While 'Demand and Supply' (Option D) are the forces that determine the prices, it is the Price itself that serves as the final instrument or 'invisible hand' that directs the allocation of resources.
• This is a classic distinction in economic theory: Supply and Demand are the drivers, but Price is the allocator.

Information Booster:
• Command Economy: Resources are allocated by the government/central planning authority.
• Mixed Economy: Resources are allocated by both market forces and government intervention.
• Price Mechanism: Term coined by Adam Smith as the 'Invisible Hand'.

Additional Knowledge:
• Option A is only one half of the market force. Option B is an external shock, not a mechanism of allocation. Option D is often considered a correct answer in general conversation, but in strict economic GS terms, 'Prices' is the specific mechanism of allocation.