How markets find a price

Price discovery is the process by which a market arrives at a price through the interaction of many buyers and sellers — no central authority sets it. In a competitive market, buyers post what they will pay and sellers what they will accept, and trades happen wherever a bid meets an ask. Remarkably, even though each trader knows only their own valuation, this back-and-forth quickly converges on the equilibrium price: the single price where the quantity buyers want equals the quantity sellers offer. The outcome is efficient — the buyers who value the good most and the sellers who can supply it most cheaply are the ones who trade — so total surplus is as large as possible. It is the logic behind stock exchanges and commodity markets, and a striking demonstration that a decentralized market can self-organize into the efficient result that supply-and-demand theory predicts.