The Price System


  • Economists refer to the word market as trade- somebody has something to sell and somebody else wants to buy the product that is being offered. So, whenever people come together for the purpose of exchange or trade we have a market. It is simply a term used to describe the process through which products that are fairly similar are bought and sold. Example. Housing market, labour market, PC market.
  • A market is not necessarily a physical place. Example. Buying and selling on internet.

Sub- Markets

  • Sub-markets= Breaking down an investigation into smaller sections of the overall market.
  • Example. In the PC market. Sub-markets of the computer industry are ; various types of computers in terms of memory, speed, features, PC’s, Laptops, brands etc.

Price Mechanism

  • In the market system, resources are allocated by the price mechanism (Demand and supply interaction). The price will adjust to equate supply and demand.

The price mechanism has 3 functions:




(1)Rationing – Given that resources are scarce and wants are infinite, the price mechanism rations demand so that it meets supply. If demand is greater then supply price increases to reduce the quantity demanded until equilibrium  is reach.

(2)Incentive – High prices act as an incentive to producers in other markets to leave them and come into this one because of the profits that can be earned.

(3)Signalling – The price acts as a signal to producers, if prices increase this is a signal to produce more.

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