Defination of the price Mechanism
This is a system where economic resources are allocated for the free forces of demand and supply. It is the main feature of the market economy. It is the price mechanism which provides solutions to the basic economic problems of what to produce, how to produce and for whom to produce. The price mechanism is also known as the price system.
The function of the price mechanism
The price of a commodity is determined by the forces of demand and supply without government regulations.
Changes in demand or supply will lead to changes in price. For instance, an increase in the demand for a commodity is a sign that the society desires that commodity. This will lead to an increase in the price of the commodity and is also an indication to the producers that the commodity is profitable. Producers will put their resources to the production of this commodity. In order words, they will move their resources from other others with less demand for the production of the commodity whose prices are rising. It is therefore the price mechanism that is helping producers to allocate their scarce resources.
It indicates to producers what they should produce with their limited resources.
Changes in demand or supply will lead to changes in price. For instance, an increase in the demand for a commodity is a sign that the society desires that commodity. This will lead to an increase in the price of the commodity and is also an indication to the producers that the commodity is profitable. Producers will put their resources to the production of this commodity. In order words, they will move their resources from other others with less demand for the production of the commodity whose prices are rising. It is therefore the price mechanism that is helping producers to allocate their scarce resources.
It indicates to producers what they should produce with their limited resources.
In this system to demand a good is like to cast a vote for the production of that good. When a particular good is demanded most in the market it means that the people desire it and will buy it if it's produced. The demand for a commodity in the market shows the popularity of that commodity to producers and the price of that commodity will rise if the demand is increasing. Producers use their resources to produce goods whose price are rising. In other words consumers are indirectly casting their votes for the production of a commodity when ever they are buying the commodity.
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