PRICE MECHANISM

PRICE MECHANISM

The allocation of the factors of production in a perfect market is not done through government regulations but by the forces of demand and supply known as the price Mechanism.

Reduced to basics, the price mechanism is an economic pragma in which the individual as the controller of factors of production has a wide advantage on how the resources are deployed.

In a free enterprise in which the price system applies, factors of production are privately owned.

One major advantage of the price Mechanism is that it allows for efficient allocation of resources.

In a command economy like China and Russia, the price system is tampered with as the government determines the flow of resources into the areas of need. In addition, the government through state monopolies owns majority of the factors of production.

The major flaw of the price system is the raw assumption of perfect competition, but in the real world competition is nowhere perfect. The imperfections of competition leads to the emergency of monopolies which results in wrong prices and a manipulation of output to achieve higher prices or rent.