Market mechanism

The interaction of supply, demand, and prices. Here is a simple example: imagine that two producers of fizzy drinks are in competition. One produces orangeade, the other lemonade. If tastes swing away from orangeade to lemonade, demand falls for the former and rises for the latter. In response to falling demand, the orangeade producer lowers prices; in response to rising demand, the lemonade producer raises them. The consumers react to the higher prices by buying less lemonade, and to the lower prices by buying more orangeade, so that demand for the two returns to the original level.

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Market mechanism is a term from economics referring to the use of money exchanged by buyers and sellers with an open and understood system of value and time trade offs to produce the best distribution of goods and services. The use of the market mechanism does not imply a free market; there can be captive or controlled markets which seek to use supply and demand, or some other form of charging for scarcity, both in social situations and in engineering.

See also

• Private sector
• Capitalism

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