FUNCTIONS OF THE PRICE SYSTEM
The price system function such a manner that the adjustments in the System take place almost automatically without and direction oror dictation from a central authority, Pnce IS the coordinator both of production and COli umption. The consumers arc able to convey their preferences through thc prices they arc willing to offcr. Similarly, the producers arc able to indicate the .accuracy or abundance of a commodity by mean of the price they arc willing to accept, If price rise it ch demand and stimulates supply. and vice versa. If there is a greater demand for a commodity than the supply thereof, thcn the adjustment between the two will be brought about through . Conversely, if the supplyi~greater than the demand, the price will fall and bring about an equilibrium between the two.
service of services of the agents interest and profits arc the prices paid for the fartol’ of production. If. for instance, there 1 a large supply of labour, wages will fall and induce the employers to employ more and absorb the extra supply. If. Iln the other hand, the supply of labour has been l curtailed by war or epidemics, the wages will rise and give a warning signal to the employers of this shortage. The price system collates and transmits to ‘millions uf consumers and producers the required information. as it were, regarding the availability of, and desires for ill conceivably large number and bewildering variety of goods and services and the industries are motivated to react approprately. change in wages and terms of employment matches
the demand for. and supply of. each type of the workers. By adjusting the patterns of economic activity. the price system balances the relevant supply and demand. There is no Iavouritism and 11(‘ injustice. No other alternative, e.g .. job assignment by a central authority can do the trick except allocating jobs and workers by a free labour market,There may he times, for instance. when saving is essential for the growth of
thc economy or when shortage is feared and consumption has to he curtnilcd. In a free enterprise economy. a rise in the price will achieve the objective. Rationing cannot be tolerated for lung and is out of place in normal tim s. An economy exists to provide the people with goods and services they want. unless they voluntarily withdraw their demand in the face of a forbidding price. The price system compels thc consumers to express their preferences in a manner to match these preferences to the producer’s costs. The price system thus makes an economy responsive to the desires of the consumers and the potentialities of the producers.
Allocution Ill’ Resources. T he productive resourcesuf the community, human and material. are automatically as it were, allocated among the various uses in such a manner that each makes a maximum contribution to the total output. Any localisation will be rectified by transferal resources from one use to no ther through the price indicator. For instance. if land can make more valuable contribution, when devoted to the cultivation of food crops, the object will be accomplished by higher food prices. Unless an economy is flexible and can quickly adapt to changed situations. efficient administration if its resources over time will not It is the price system which provides this . As consumers’ tastes preferences . new techniques of production arc discovered and resource supplies undergo change, the particular allocution of resources will cease to he appropriate and efficient. Adjustment to change takes place through price-mechanism. For instance. if consumer’s tastes change, this will be communicated to the producers through changes ill price of the goods concerned. If certain goods arc in greater demand. the prices will rise giving supernormal profits to the existing firms and new firms will enter the industry. In this way, industry expands to meet increased demand. On the other hand, the industry, for whose goods the demand is decreased, contt ads. Thus, the price system elicit,appropriate responses from the firms as well a resource suppliers to a given change in consumer’s preferences. This is its guiding and directing fuuctiou. By and large, the competitive price system i, couducive to technological improvements and capital formation and other inter-related changes which result in greater productivity and higher level of matcnuls wellbeing .