Tag: economics

In price mechanism, factor income directs the flow of factors of production in the market as if the income rises, the supply of the factors increases and if the income decreases, the supply of the factors decreases. 

Factor income directs the flow of factors of production in the market but it also contributes to the consumption expenditure or aggregate demand in the economy as if factor income increases the aggregate demand also increases and if factor income decreases the aggregate demand also decreases. 

Price mechanism refers to the mechanism where price directs the flow of goods and services in the market as it directs the supply by the production sector i.e supply will increase if price increases and vice-versa and the demand sector i.e demand will increase if price decreases and vice-versa. This leads to distribution of goods and services according to the purchasing power of the individuals which brings inequality in the distribution channel. Therefore, only those goods are produced which are in high demand like luxurious goods etc. 

Price mechanism is also know as free enterprise mechanism as here the flow of goods and services in the market is directed by the supply of the production sector and purchase by the demand sector. Therefore all the economic agents are free here with mutually interdependent relations. 

Price mechanism refers to the mechanism where price directs the flow of goods and services in the market as it directs the supply by the production sector i.e supply will increase if price increases and vice-versa and the demand sector i.e demand will increase if price decreases and vice-versa. Therefore, it coordinates and organize activities in a free enterprise economy. 

The central problem of "How to produce?" which is faced by the economy where the economy consider either labour intensive techniques or capital intensive techniques for the production of goods and services in the economy depending upon the available resources in the economy. Therefore, a producer will go with the technique which is cheapest among all the techniques of the production. 

In price mechanism, the market decides the price of each and every commodity therefore producers become the price taker but they try to influence consumers by the way of advertisement, propaganda and salesmanship so that every consumer in the market become their customer which break the laws of consumer sovereignty in the economy. 

Adam Smith was a Scottish economist who emphasized on price mechanism as a invisible hand that aims at both economical i.e. personal gains as well as social i.e. human gains welfare as it is not influenced by any intervention from any party not involved. 

The central problem of "How to produce?" which is faced by the economy where the economy consider either labour intensive techniques or capital intensive techniques for the production of goods and services in the economy depending upon the available resources in the economy is easily solved in a price mechanism economy as resources are utilized here depending upon the demand and supply of commodities in the market.