Introduction

In a capitalist economy, individual consumers make plans of consumption and individual firms make plans of production based on the changes in market prices. The term 'invisible hand' is used by economists to describe the frequent exchanges in the market because everyone (no matter consumer or producer) takes the market price as a signal on trade and makes exchanges with private property rights (defined and protected by laws).

The price system works in a market economy only if there is free choice within the market. The following sections explain how the market price is determined by the interaction of consumers (demand) and producers (supply).