What concept refers to the economic principle that prices are determined by the interaction of supply and demand?

The concept that refers to the economic principle where prices are determined by the interaction of supply and demand is known as market equilibrium. In a market, equilibrium is achieved when the quantity of goods supplied matches the quantity of goods demanded at a specific price level. At this point, there is no surplus or shortage of goods in the market, which stabilizes prices.

When supply increases or demand decreases, the market must adjust to restore equilibrium, often leading to a drop in prices. Conversely, if demand increases or supply decreases, prices are likely to rise as consumers compete for the available goods. Understanding this interaction is crucial for analyzing how markets operate and how various factors such as consumer preferences and production costs can influence pricing strategies.

The other concepts, while related to economic decision-making, do not specifically address the determination of prices through the interaction of supply and demand. Price elasticity, for instance, measures how responsive the quantity supplied or demanded is to a change in price. The supply chain focuses on the logistics of moving goods, and cost-benefit analysis involves weighing the advantages and disadvantages of different choices rather than directly explaining price determination.