Market Equilibrium & Price Mechanism

A market is any arrangement in which buyers can trade with sellers. The trade can be face-to-face (a street stall) or virtual (eBay, Amazon). In every market, the interaction of demand and supply sets the price at which goods change hands and the quantity that gets traded.

Topics 4 and 5 looked at demand and supply on their own. This topic puts them together.

Two opposing pressures meet in any market:

• Buyers want the price to be low (and bid less when it is high).
• Sellers want the price to be high (and offer more when it is high).

The two sides settle on the price at which the quantity each side wants to trade is equal. That price is the market equilibrium.