With the use of a relevant example, explain how prices are determined in a market system ?
Ans ) Price depends on the market forces of demand and supply for example if the price of the good or service is high the production will be low but if the demand of the good or service is high then the seller could also increase the production too. For example if the selling product has alot of demand but its supply is low then the price of the product will be high. If the product has low demand but the production is high then the price of the product will be low.
Introduction to price mechanism
The price mechanism refers to the system of relying on the market forces of demand and supply to allocate resources.
In this system, the private sector decides on the fundamental questions of what, how and for whom production should take place. For example, wage rates are determined by the forces of demand for labour (by private sector firms) and supply of labour (by workers who offer their labour services).
Features of price mechanism :
There is no government interference in economic activities. Resources are owned by private economic agents who have the economic freedom to allocate scarce resources without interference from the government.
Goods and services are allocated on the basis of price — a high price encourages more supply whereas a low price encourages consumer spending. Goods and services are sold to those who have the willingness and ability to pay.
The allocation of factor resources is based on fi nancial incentives — for example, agricultural land is used for harvesting crops with the greatest fi nancial return, while unprofi table products are no longer produced.
Competition creates choice and opportunities for fi rms and private individuals. Consumers can thus benefi t from a variety of innovative products, at competitive prices and of high quality.
Questions
Which option is not a feature of the price mechanism?
A Competition creates choice and opportunities for firms and private individuals.
B Goods and services are allocated on the basis of price.
C Resources are owned by private economic agents who have the economic freedom to allocate scarce resources.
D Rules and regulations are imposed to correct market failures, such as the overconsumption of demerit goods
Ans ) The correct answer is D as it is not a part of market functioning
What is meant by the market system?
What is meant by market equilibrium?
How does market disequilibrium occur?
What are the three key economic questions that all economies must address?
What is the price mechanism?
What are the key features of the price mechanism?
Answers
The market system is the functioning of market through the market forces of supply and demand
Market equilibriumm occurs when the supply of the product and the demand of the product comes to same , basicaly when demand and supply are equal that situation is called market equilibrium
Market disequilibrium occurs when the supply and demand are either above or below the market equilibrium
What to produce , how to produce and from whom to produce
Price mechanism is how the market functions with the market force of demand and supply
Government does not involve in the market mechanism and private firms have the freedom to produce scares resource