In economics, a Price System is any system that involves the use of fixed prices or fixed exchange rates for the allocation and valuation of goods, services and resources. In this article I will cover some basics about the use of a Price System in economics.
To put it simply, a Price System involves a set of fixed prices for all commodities or services. The pricing of a commodity is then determined by comparing the prices of two competing goods. The relative values of goods are established by comparing a commodity’s value to its cost to produce and its current market value. The prices are established based on the principle of demand and supply.
In economics a Price System is used to determine who gets to sell or buy the most goods or services at the highest price. This is done through the intervention of a central authority. An authority such as a government will intervene with its monopoly on money supply by setting a fixed price that the central bank will enforce.
Another important concept associated with the use of a Price System is price determination. Price determination refers to the process by which markets determine the relative value of various commodities, goods or services. The concept of price determination is usually associated with the theory of economic cycle.
Price determination is the process by which a market determines the value of a commodity by determining its price in relation to other goods. In economics a process of price determination is necessary in order to provide an objective basis for determining the value of commodities, goods or services. Price determination also provides a means to allocate scarce resources in a manner that is favorable to society at large.
There are many different models and theories of price determination, but they all share the following basic features: First, there should be a single and definitive set of prices that all consumers are expected to pay. Second, these prices should be consistent across time and different markets.
Price determination may also be a result of the introduction of a new good into a market or a process of competition between existing goods. Market failure to observe this principle can result in price manipulation, where sellers manipulate the prices to gain a competitive advantage. or the establishment of a monopoly where sellers are able to charge prices higher than those of competitors.
The use of a Price System is important for all economies because price determination enables people to purchase the best and most desirable goods or services at the lowest possible cost. and allows us to allocate scarce resources in a more efficient manner.
The basic assumption underlying Price Determination is that the only valid source of information about the value of a commodity is the consumer’s perception of that value. The assumption is that the consumer has a full knowledge of all relevant information regarding the quality, quantity, price and characteristics of a particular commodity.
The price determination of a market is based on three basic factors: information, efficiency and competition. The first factor refers to the ability to acquire information from the market. The second factor refers to the efficiency in the transfer of information from seller to buyer, and the third factor refers to the efficiency of information dissemination
The consumer needs information when they are shopping. A good example of information would be if a consumer is shopping for a pair of shoes. They will need to be able to compare the price and quality of different pairs of shoes, they will need information on the sales tax rate in their area, what percentage of sales tax is required to purchase the pair of shoes and how long it will take to get the shoes back, what condition the shoes are in and how long it will take to return the shoes if the shoes are returned. Consumers want to make informed decisions about purchasing goods, so they must have all of this information available before they decide whether to purchase the goods or not.
Efficiency refers to the ability of a price system to allocate scarce resources. In most cases in a market, there will always be a set amount of money or commodities on the market in relation to a demand for the same good or service. When an allocation problem exists, such as too much goods or too little goods or too few goods or services, then sellers will attempt to fix the problem by setting a fixed price. Inefficient prices are the result of inefficient allocation of scarce resources.