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:
2. Transmission of preferences:
3. Rationing function
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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