Supply & Demand Together Determine Prices

Now that we have individually examined both supply and demand, we are a step closer to understanding the market economy. The price and quantity of goods and services in everyday life are determined as a result of supply and demand. The point at which supply and demand intersect is known as market equilibrium. This point on the model represents the price at which the quantity demanded by consumers is equal to the quantity supplied by producers. This is the ideal outcome in the market because the most efficient producers are sellers and those who are most willing to pay are the consumers. Market equilibrium maximizes both consumer and producer surplus and extracts all potential gains from trade.

While it may be clear why market equilibrium is desirable and how supply and demand intersect to create prices, many may ask "How does the market get or stay in equilibrium? How is it that markets naturally correct to equilibrium without any central planning agency determining prices and outputs?" Both of these are valid questions and I will be sure to explain both shortage and surplus and the importance of competition of both buyers and sellers. These concepts coupled with incentives and self-interest make up the invisible hand that steers suppliers and consumers to the point of market equilibrium.

Below is a learnliberty.org video that explains the importance of free market pricing

If you enjoyed this video, CLICK HERE for part 2