Price System

Definition of Price System:

Price system is a component of any economic system, that uses prices expressed in any form of money, for the valuation and distribution of goods and services, and the factors of production, to determine the rate at which goods and services are produced, distributed, and exchanged.

It can also be referred to as the Price mechanism.

The prices are fixed by buyers and sellers through negotiation. Price in a perfect market is determined by the interaction of the forces of supply and demand, in relation to the conditions of demand and supply. The interaction of the forces of demand and supply is where demand is equal to supply, which has to do with the negotiation of buyers and sellers on the price of goods and services. 

Functions of Price System:

1. Allocation of productive resources among producers.

2. Indicates changes in demand.

3. Indicates changes in supply.

4. Determine income received by factors of production.

5. It indicates the distribution among consumers (i.e. firms and private, etc).

6. Regulates production for current and future purposes.

7. It can determine the quantity and quality of goods produced.

Importance of Price System:

The price system confers the following freedoms;

1. Freedom to buy and sell.

2. Freedom to enter into a contract.

3. Freedom of choice and employment.

4. Freedom to private ownership.

Evaluation Questions