Assumptions and definitions

The theory of supply and demand usually assumes that markets are perfectly competitive. This implies that there are many buyers and sellers in the market, and none of them have the capacity to influence prices of goods and services significantly. In many real-life transactions, this assumption fails because some individuals (both buyer and seller) have the ability to influence prices. Often, it takes a more in-depth analysis to understand the demand-supply equation of a good. However, this theory works well in simple situations.

Economic mainstream (mainstream economics) does not assume a priori that markets are preferable to other forms of social organization. In fact, much analysis is devoted to cases where so-called "market failures", which led to the allocation of resources suboptimal, when viewed from a certain perspective (an example is simply the toll road, which benefits everyone to use but do not directly benefit them to finance it). In this case, economists will try to find policies that will avoid waste directly under government control, indirectly by regulation that induces market participants to act in a manner consistent with optimal welfare, or by creating "missing markets" to allow efficient trading where none had previously existed. This is studied in the field of collective action. It should be noted also that the "optimal welfare" usually takes Paretian norm, which in its mathematical application of Kaldor-Hicks efficiency, not consistent with the Utilitarian norm within the normative side of economics which studies collective action, namely public choice. Market failure in positive economics (microeconomics) is limited in implications without mixing the belief of the economist and his theories.

Demand for various commodities by individuals is generally referred to as a result of utility-maximizing process. The interpretation of the relationship between price and quantity demanded of a given item, given all the goods and other services, this set of choices that will provide the highest happiness for consumers.