How Are Prices Determined in a Free Market Economy?

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Prices are determined in a free market economy through the interactions of supply and demand in the marketplace, where demand is the quantity of a product that buyers are willing to purchase according to a given price and supply is the amount of a product that sellers can vendor to customers at a given price. In various market economy theories, price plays an essential role in how sellers determine their prices and buyers act on those prices. Supply and demand are important factors to consider as stakeholders will always try to find the best allocation of their resources.

The laws of supply and demand are very simple. If all factors are equal, the higher a price is for a good, the less apt buyers will be to pay the price for the good and, therefore, the smaller the quantity of the good will be sold. However, if supply for a good is very high, but a seller has a very low quantity of the good, the price can be very high and the seller will still benefit. Conversely, if the supply of a product is very high, but sellers have a very low demand for the good, the price will likely be very low as sellers will be trying to sell higher quantities of the good to increase their revenue.