In a socialist economy the various elements of the price mechanism costs, prices and profits- are all planned and calculated by the planning authority in accordance with the targets of the plan. A price mechanism is a system by which the allocation of resources and distribution of goods and services are made on the basis of relative market price. price mechanism works through prices in a free enterprise economy, where all goods and services carry price tags with them. Prices provide a mechanism for automatically distributing limited resources to places of need.
There are two important elements of price mechanism – 1. Price mechanism plays an important role in solving the fundamental economic problems. Price stability contributes to achieving high levels of economic activity and employment by . B.

The Role of Prices. maximize profits). Thus, price mechanism serves as an allocative mechanism telling producers what to producer. • Optimum utilization of resources – use factor of production efficiently -> minimize costs (i.e. • High efficiency and incentive to work hard – to earn max profits. improving the transparency of the price mechanism. Since the villages of complex county operate under a free market economy, individual merchants in each village list their products for the price of their choice. Benefits of price stability. For its efficient functioning, price mechanism crucially depends on the characteristics of product market and factor market. But such perfect competition did not exist, nor any modern economy is characterized by perfect competition, or ever will it be. Price Mechanism in a Socialist Economy: The price mechanism has little relevance in a socialist economy as it is regarded as a distinguishing feature of a free market economy. PRICES - prices are essence of price mechanism. Price (dollar votes) answers the question of for whom the goods should be produced for. It implies avoiding both prolonged inflation and deflation.

Resources moving from declining sectors to expanding ones and stopping in equilibrium demonstrate the way the market mechanism (price mechanism) operates. In an economy particularly free market economy and to a less extent in controlled economy, the resources can be allocated and reallocated by the process of price reduction and price increase.


To be more specific, these two markets must be characterized by perfect competition. High prices result in lower prices. The objective of price stability refers to the general level of prices in the economy.
Price is the Pivot of an Economy: In the economic system, price is the mechanism for allocating resources and reflecting the degrees of both risk and competition. a whole … Through the signalling function, it also answers the question of for whom to produce. Price mechanism is a term referring to how the change in the prices of commodities affects demand and supply. Merits: • Automatic working – no central directing authority, i.e. This was first spotted by Adam Smith in the Wealth of Nations as early as 1776 although the diagrams did not come until later.