Price Mechanism or Market Mechanism, Explain their meaning and definition. Understand the article, What is the Price Mechanism or Market Mechanism?
Price Mechanism, It is the mechanism through which the prices of commodities and factor services get determined through the free play of market forces of demand and supply. The theory that the determinations about what prices and quantities to purchase are essentially set by both sellers and buyers in the market. Define – What is the Price Mechanism or Market Mechanism?
“In economics, a price mechanism is the manner in which the prices of goods or services affect the supply and demand of goods and services, principally by the price elasticity of demand. A price mechanism affects both buyers and sellers who negotiate prices. A price mechanism, part of a market mechanism, comprises various ways to match up buyers and sellers. The price mechanism is a mechanism where price plays a key role in directing the activities of producers, consumers, resource suppliers. An example of a price mechanism uses announced bid and ask prices. Generally speaking, when two parties wish to engage in trade, the purchaser will announce a price he is willing to pay (the bid price) and seller will announce a price he is willing to accept (the asking price).” By Wikipedia.
According to BuisnessDictionary, the Price mechanism is defined as, “System of interdependence between the supply of a good or service and its price. It generally sends the price up when supply is below demand, and down when supply exceeds demand. Price mechanism also restricts supply when suppliers leave the market due to low prevailing prices and increase it when more suppliers enter the market due to high obtainable prices.”
Next, capitalistic Economy is defined as, “Economic system based (to a varying degree) on private ownership of the factors of production (capital, land, and labor) employed in the generation of profits. It is the oldest and most common of all economic systems and, in general, is synonymous with the free market system.”
According to Cairncross.
“It is the mechanism by which prices adjust themselves to the pressure of demand and supply and in their turn operate to keep demand and supply in balance.”
The interaction of buyers and sellers in free markets enables goods, services, and resources to be allocated prices. Relative prices and changes in price reflect the forces of demand and supply and help solve the economic problem. Resources move towards where they are in the shortest supply, relative to demand, and away from where they are least demanded.