Supply and demand are equated in a free market through the price mechanism. If buyers wish to purchase more of a good than is available at the prevailing price, they will tend to bid the price up. If they wish to purchase less than is available at the prevailing price, suppliers will bid prices down. The price mechanism thus determines what quantities of goods are to be produced. The price mechanism also determines which goods are to be produced, how the goods are to be produced, and who will get the goods—i.e., how the goods will be distributed. Goods so produced and distributed may be consumer items, services, labour, or other salable commodities. In each case, an increase in demand will lead to the price being bid up, which will induce producers to supply more; a decrease in demand will lead to the price being bid down, which will induce producers to supply less. The price system thus provides a simple scale by which competing demands may be weighed by every consumer or producer.

The tendency to move toward the equilibrium price is known as the market mechanism, and the resulting balance between supply and demand is called a market equilibrium.

As the price of a good rises, the quantity offered usually increases, and the willingness of consumers to buy the good normally declines, but those changes are not necessarily proportional. The measure of the responsiveness of supply and demand to changes in price is called the price elasticity of supply or demand, calculated as the ratio of the percentage change in quantity supplied or demanded to the percentage change in price.