Price As Control - Key Concept

In a free market, all other things being equal, price acts as a control to balance supply and demand for goods. If the price is too low, demand will exceed supply, creating a shortage. Responding to the shortage, firms will increase their price. If they increase the price too high, supply will exceed demand creating a surplus. In response to the surplus, firms will lower their price. Demand and supply are equal at the center of our famous X on the graph. This point is what we call the market equilibrium. At this price, there will be neither a shortage nor a surplus.