PRICE SYSTEM OR PRICE MECHANISM

CONTENT

1. Meaning of a Price

2. The Concept of Price System or Price Mechanism

3. Factors that Determine Price of Commodity

MEANING OF A PRICE

A Price– is defined as a monetary unit of measurement or value that helps to facilitate the exchange of goods and services in the market. That is, a price is the rate at which something can be exchanged for another thing. For goods to command a price, it must have the attributes of usefulness (valuable) and relative scarcity.

PRICE SYSTEM OR PRICE MECHANISM

In a free market economy, prices of goods and services affect the behaviour of both the consumer and the producer (supplier).  Price system maybe defined as a system whereby prices of goods and services are determined by the free interaction of the forces of demand and supply in a free market economy. That is, it is a system of resources allocation based on a free movement of prices. It id described as a process by which the monetary value of a commodity, service, or factor of production is determined by the inter-play of the market forces of demand and supply.

FUNCTIONS/IMPORTANCE OF THE PRICE SYSTEM

1.         The price system operates to allocate scarce resources

2.         It regulates the flow of goods and services from producers to the consumer.

3.         It determines the extent of demand and supply of goods and services.

4.         It is used to encourage or discourage consumption of certain goods and services.

5.         It helps to determine how the factors of production will be rewarded.

EVALUATION

1. Define price mechanism.
2. List the  importance of a price mechanism.

FACTORS THAT DETERMINE PRICE OF COMMODITIES

a.         The cost of production of the product

b.         The level of profit desired by the seller

c.         The level of competition in the market

d.         Government policies e.g subsidies, taxation etc.

e.         The activities of Trade Unions

f.          The cost incurred on advertisement

g.         Changes in demand and supply

PRICE FIXING METHODS

The prices of goods and services are often fixed by any of the following methods:

1. Through Bargaining System
2. Through Sales by Auction
3. Through Sales by Price Tags
4. Through Market Forces of Demand and Supply

EVALUATION

1. Explain factorsthat determine price

2. State three price fixing methods

READING ASSIGNMENT

1. Amplified and Simplified Economic for SSS  by Femi Longe  page 290–296
2. Fundamentals of Economics by Anyawuocha page 166-168

GENERAL EVALUATION QUESTIONS

1. Distinguish between fixed cost and variable cost.
   1. Under what condition will a perfectly competitive firm maximize profit.
   1. Describe each of the following: (a) abnormal demand (b) effective demand
   1. What is a public corporation?
   1. Explain the causes of a declining population.

WEEKEND ASSIGNMENT

1. At the equilibrium price, quantity demanded is (a) greater than quantity supplied (b) equal to quantity supplied (c) less than quantity supplied (d) equal to excess supply
   1. The market price of a commodity is normally determined by the (a) law of demand (b) Interaction of the forces of demand and supply (c) total number of people in the market (d) total quantity of the commodity in the market
   1. The gap between demand and supply curves below the equilibrium price indicates (a) excess demand (b) excess supply (c) equilibrium quantity (d) equilibrium price
   1. If prices fall below the equilibrium (a) demand will equal supply (b) demand will be greater than supply  (c) supply will be greater than demand (d) quantity supplied will be zero
   1. The price system refers to the system by which (a) the government control prices in the economy (b) prices tend to rise to a general level (c) price allocates resources between consumer and producer goods (d) the producers fix the price of their products

THEORY

1.         Given the demand and supply function for a crate of eggs as follows: Qd = 12 –2p;      Q = 3+1p

            a. Determine the equilibrium price and quantity

            b. What is the excess supply at the price of N3.50? 

2.         State three factors that determine the price of commodities