Prices adjust to balance supply and demand.
The core model of price economics, and the standing caveat is that it describes competitive markets with many buyers and sellers. Most interesting cases — labour, healthcare, housing — violate at least one condition.
In practice
- A glut of a crop drops the farm-gate price within a season and the supermarket price barely moves, because the two markets have different numbers of buyers.
- The standing caveat matters: housing, healthcare and labour each violate a condition of the model, which is why the simple version misleads about all three.
- Further reading
- Wikipedia
- Subject
- Economics & Incentives
- Essay
- The theories behind every argument about money