How the Free Market Really Works

In the typical Econ. 101 class, we are told that price is determined by the balance of supply and demand. Since higher prices give incentives to suppliers to increase the supply and the purchasers to consume less, while lower prices will depress supply and increase demand, the price will stabilize where supply = demand.

But how does this happen in the real world? Take the case of a wedding photographer. He must charge enough so as to remain alive and to pay for equipment and supplies. But how much should he actually charge beyond that?

One might imagine that the photographer adjusts his charges till he gets sufficient work to fill the fixed resource that he has - the number of events that he can go to in an year. If he gets more work than he can fulfill, he can raise his rates, etc. In practice, one would imagine that he has a fixed price list and offers discounts if necessary - it would not be good to be constantly fiddling with his published rates.

In the real world, however, he asks other photographers.