Wednesday, 25 March 2020

PRICE SYSTEM

PRICE SYSTEM (FREE MARKET SYSTEM)

Price is the value which is attached to goods and services and these goods are acquired in monetary system.
It is the monetary value of a commodity. It is the amount of money one exchanges for a
commodity. In the free market system, the price of a commodity is determined by the
interaction of the forces of market demand (the actions of buyers) and market
supply ( actions of sellers). The process by which the market forces of demand
and supply interact to fix the price of a commodity is referred to as the 
price system.The market system is the process by which the market forces of demand and supply
interact to fix 
price and the quantity of a commodity. It is the buyers and sellers who actually determine the price of a commodity. But sometimes the government controls the price mechanism to make commodities affordable for the poor people too.

The price mechanism plays three important functions in a market:
1. Signalling Function:
  • If prices are rising because of high demand from consumers, this is a signal to suppliers to expand production to meet the higher demand
  • If there is excess supply in the market the price mechanism will help to eliminate a surplus of a good by allowing the market price to fall.
  • Prices rise and fall to reflect scarcities and surpluses.

2. Transmission of preferences:

  • Through their choices consumers send information to producers about the changing nature of needs and wants, what to be currently produced and the current price of the changed goods.
  • Higher prices act as an incentive to raise output because the supplier stands to make a better profit.
  • When demand is weaker in a recession then supply contracts as producers cut back on output.

3. Rationing function
  • Prices serve to ration scarce resources when demand in a market is greater than supply.
  • When there is a shortage, the price is increased – leaving only those with the willingness and ability to pay to purchase the product.

Article by: Monday Desmond

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