In capitalist economies, prices are determined by the laws of supply and demand. It is negotiated and re-negotiated by producers and consumers, because there is competition that provides choices.

In a free market economy of 100 people, the price of milk will be set by how much producers can make and how much consumers are willing to pay for it. If the supply of milk can meet the demands of 100 people by charging $1.25 a gallon, then prices will hover in that area. However, if the demand is higher or supply is lower, the prices will rise to reflect it. Alternatively, if demand is lower or supply is higher, prices will drop to reduce the surplus.