Price mechanism essay

We'll occasionally send you account related and promo emails. One, each manager should combine productive goods and services in such a manner that the average cost of producing a given output is the minimum.

The role of price mechanism in a free market economy or capitalism! This figure shows the price mechanism in the form of a circular flow. Wage is the price for the service of labour, rent is the price for the service of land, interest for the service of capital and profit for the service of entrepreneur. Role Of Price Mechanism. Since goods are produced in anticipation of demand, an increase in demand brings about shortages and this leads to rationing. This problem can be explained with the help of the production possibility curve, as shown in Figure 7.

Sorry, but copying text is forbidden on this website! Hi there, would you like to get such a paper? How to cite this page Choose cite format: The problem of how to produce goods and services is also solved partly by the price mechanism and partly by the state.

The first function of prices is to resolve the problem of what to produce and in what quantities. How about make it original? For producing capital goods and large outputs, complicated and expensive machines and techniques are required. Thus it is the central planning board that performs the functions of the market. It determines what to produce and how much to produce.

Ultimately, a position of equilibrium will be reached where price equals both the average cost and the marginal cost of production. Every producer aims at using the most efficient productive process.

The decision as how to produce different commodities is also taken by the central planning authority. Administered prices are fixed arbitrarily by the central planning board without calculating the actual cost of production of commodities. Role Of Price Mechanism Essay. They are administered prices at which commodities are sold in state-run stores throughout the country. There are administered prices which are raised or lowered by the state.

For this, it adopts social security programmes and levies progressive taxes on income and wealth. He must see to it that the industry produces exactly as much of a commodity as can be sold at a price which equals the marginal cost. If you contact us after hours, we'll get back to you in 24 hours or less.

In order to reduce costs of production, he substitutes cheaper resources for the dearer. This is how prices are determined on the factor market. The choice of a production process will depend upon the relative prices of the factor services and the quantities of goods to be produced.

Instead, they are made by the central planning board assisted by the various ministries, industries and state enterprises. The problem for whom to produce is also decided partly by the market mechanism and partly by the central planning authority. If the society gives priority to the production of more consumer goods now, it will have less in the future.

In making this decision, social preferences are given weight-age. Since the resources of the economy are scare, the problem of the nature of goods and their quantities has to be decided on the basis of priorities or preferences of the society. As regard wages, they are also fixed by the state according to the amount and quality of work done by an individual.

In those spheres of production where the private sector competes with the public sector, the nature and quantities of commodities to be produced are also decided by the market mechanism.

Prices can be reduced or increased only by the central planning authority. The decision as to how to produce is entirely taken by the producers. In the private sector, it is the market mechanism which determines what goods and services are to be produced on the basis of consumer preferences and incomes. The profit motive determines the techniques of production in the private sector.

Two, each manager should choose that scale of output which equalises marginal cost to price. This, in turn, depends on the process of trial and error which necessitates small adjustments in prices from time to time. In the former case, the industry would expand and in the latter case it would cut down production. Your Answer is very helpful for Us Thank you a lot!

In deciding the total output of the economy, the society has to choose that combination of capital and consumer goods which is in keeping with its resources. In such an economy, consumers and producers are largely the same people. How many kilos of wheat, how many million metres of cloth, how many kilometers of roads, now many televisions, how many million kw of power, how many buildings, etc.

It is the state which decides where to use capital-intensive techniques and where to use labour-intensive techniques in the public sector. We use cookies to give you the best experience possible. How about receiving a customized one?

At the same time, the central planning authority intervenes and influences the working of the market mechanism. For public utility services like electricity, railways, water, gas, communications, etc.

Since a mixed economy aims at achieving growth with social justice, the allocation of resources is not left entirely to the market mechanism. Let us analyse the role of prices in all these spheres.

Since resources are scarce, the society has to decide about the goods to be produced: It determines the rewards of the factor services. On the other hand, simple consumer goods and small outputs require small and less expensive machines and comparatively simple techniques.

Nor can it choose the combination K which is outside the current production possibilities of the society. But since goods are produced in anticipation of demand, it is accounting prices which are the basis of price determination.

Sorry, but copying text is forbidden on this website. Prices are fixed by the central planning authority on the principle of profit-price policy.

A producer uses expensive factor services in smaller quantities relative to cheap resources. Hi, I am Sara from Studymoose Hi there, would you like to get such a paper? An economically efficient production process is one which produces goods with the minimum of costs.

The owners of factors of production who are all consumers sell their services at given prices for money to producers, and then spend that money to buy goods produced by producers. The central planning authority decides, for example, if more bicycles are to be produced than cars, or houses for the masses more than hotels, or more eggs are to be produced than chocolates.