In a free market1, the price of a good is determined by supply and demand. The market price of wheat emerges through the interaction of the Supply of wheat by farmers and the demand for it from flour mills and food manufacturers: when the level of supply is equal to the level of demand the market is said to be in equilibrium.

Market equilibrium1 is a market state where the supply in the market is equal to the demand in the market. At this state, the quantity and price of the product or service, match. At market equilibrium point, consumers collectively purchase the exact quantity of goods or services being supplied by producers and both the parties also agree on a single price per unit. The equilibrium price is the price of a good or service when the supply of it is equal to the demand for it in the market. If a market is at equilibrium, the price will not change unless an external factor changes the supply or demand, which results in a disruption of the equilibrium.

 

In equilibrium, the market is at rest, because all the mills wanting to buy wheat at the prevailing price can find a farmer willing to sell Some, and all the farmers wanting to sell wheat can find a flour mill willing to buy some. Often, however, markets get thrown out of equilibrium: perhaps a sudden drought lower wheat supply below demand, leading to a shortage. The power of the free market is in its ability to correct this because there are too many mill owners chasing too few bushels of wheat, farmers can increase their prices without losing sales. The higher price chokes off demand and stimulates supply until the market returns to equilibrium.


Reference:

  1. https://www.investopedia.com/terms/f/freemarket.asp