What is the Price Mechanism?

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My daughter is doing an economics assignment and has to conduct an inquiry to determine the current state of one sector of the circular flow in the Australian economy but first we need a brief explanation of Price Mechanism.

-- Bronwyn Cosh (bcosh@hotmail.com), April 23, 2000



When economists use the phrase "the price mechanism," they are referring to the process by which changes in prices guide and shape changes in the value and types of the goods and services that are produced.

Suppose that consumers decide that they want to spend more on VCRs. More consumers show up at stores hoping to buy VCRs. The stores see the higher demand, raise their prices, and also order more VCRs from producers.

Higher profits from making VCRs induces firms to expand production. Higher prices for VCRs curbs demand. Thus the system returns to a stable point with more production and purchase of VCRs, and less production and purchase of other goods.

Thus *prices* act as a *mechanism* that guides the allocation of productive resources--machines and workers--to different sectors of the economy.

Brad DeLong

-- Brad DeLong (delong@econ.berkeley.edu), April 23, 2000.

The price mechanism is a system of determination of prices and resoucre allocation. It operates in a free market situation where forces of demand and supply dictate prices. Both producers and consumers base their respective production and consumption plans on the prevailing market price. When consumers pay a price for a commodity, they motivate the producer of that commodity and hence more of the same is produced and vice versa. The price paid becomes a vote for more production. Thus resources are channelled there!

-- Richard Onyai (jadoch929@hotmail.com), October 08, 2002.

i would like to ask a question to you... from where i will find topic notes from your publications ? please send me your answer...

-- Kakajan BERDIYEW (kakacan235@yahoo.com), December 26, 2002.

THe price mechanism is that factor that controls the allocation of scarce resources in an economy.It helps to give individual buyers and sellers the idea of what, where, when how and how much to produce.

-- Keno Gray (gkeno@hotmail.com), September 29, 2003.


-- fukmom (=deal=@yahoo.com), November 17, 2003.

what the hell are you laughing at... his answer or some stupid joke. don't go typing crap on these posts. Now, I am unsure if this answer is accurate.

-- majo cujo (sexyboom@hobo.com), May 11, 2004.

no dont listen to peoples crap, this answer is correct 100%.

-- mac (mac_786@hotmail.com), October 16, 2004.

lol ahahaha

-- john muppson (toddler_uk_2k3@hotmail.com), November 09, 2004.

Price mechanism refers to the an uatomatic process by whicch prices in a free market are detemined. Prices so defined are the result of interaction of two forces... that is supply side and demand side. In addition it also helps to understand tradeoff between inflation and unemployeement,PHILIPS CURVE.

-- imran wazir (wizimran@hotmail.com), November 22, 2004.

is there a difference between price mechanism and the market mechanism?

-- puff puff (puff_cookie@hotmail.com), November 23, 2004.

wah blow

-- Chester P Hackenbush (taskforce@hotmail.com), November 23, 2004.

I'm studying this in college Environemental & Natural Resource Economics...kind of an oxymoron! So thanks to late night midterm papers! Humboldt State

-- YEP (ljw8@humboldt.edu), February 24, 2005.

what is the mechanism for the determination of price inthe economy

-- zubair (inspiringbrain2004@yahoo.com), February 27, 2005.

ya bores

-- deasel (crazy_biatch_2005@hotmail.com), March 14, 2005.

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