So how are market prices and production quantities determined? That’s where the supply and demand model comes in. Buyers’ preferences comprise the demand side of the market, and sellers’ preferences comprise the supply side of the market. Prices and quantities are then determined by the point where supply and demand come together.
It’s important to keep in mind that prices and quantities are the outputs of the supply and demand model, not the inputs. It’s also important to keep in mind that the supply and demand model only applies to competitive markets, i.e. markets where there are many buyers and sellers all looking to buy and sell similar products. Markets that don’t satisfy these criteria have different models that apply to them, and these are described in the “Types of Markets” category.