Price Mechanism
1)
------Price
mechanism represents the situation where all economic decision are performed on
the basis of prices.
2)
-----or
when price perform all the decision like what to produce, how to produce, and
how it is to be distributed is done by invisible hand (prices) is price system
or price mechanism.
3)
As
lewis says, “in socialism all the decision are performed on the basis of
direction --------- and, in capitalism all the decision are performed on the
basis of inducement”
Such inducement is shown by the prices as consumer express their preferences
produce those commodities and reap greater profit. In short we can say that
prices perform all the decision of production, consumption and distributed in
capitalistic economy.
Now we see what role is played by price mechanism in the capitalistic
economy.
1.
------The influence of the price Mechanism on resource allocation.
Resources allocation:
------ The process by which scarce resources in the economy are distributed
amongst their alternative uses.
Resources: ------ these
are agents------ or------factor of production used in an economy to produce and
distribute goods and services.
(These are classified into
land, labor, capital etc)
The resources of any country are of
various kinds.
i.
-------Visible----- a---natural resources (like soil and forest)
b-----human resources (like
machinery and building)
ii.
---non-visible---- a-----mental resources as labor of
lecturer, or advocate.
b-----physical labor as----work by
laborer.
Under this system resources are
automatically adjusted by the guidance of
----Prices-----becoz the price is
the regulator of both consumption and production-------on the basis of self
interest.
The owner of the resources will sell their resources to those uses whih
give them higher prices.
Example:
i.
----
if there is a problem of iron allocation, i.e how much iron will go for washing
machine and how much for the room cooler under the motive of self interest the
owner of the capital will sell their iron to that use which pay them more price.
ii.
---
Land would be used for that crop which can earn more prices.
iii.
----
A professor will go to (USA) in search of higher reward and left his home
country within no time. It shows all our decision is based on self interest or
in the light of price mechanism.
Critical
analysis
The critics of the view are that price mechanism is responsible for
improper allocation of resources. The c raze to earn more profit, is so
powerful that it neglects all thee collective interests of the society to
explain it we give the following reasons.
i.
---price distortions
a)
`---
in most of the developing countries the prices do not represents the real value
of the resources. This is because of the market imperfection, monopolies.
b)
----
in the presence of restriction on import the domestic prices are for above the
world price thus the resources allocation will be un optimal.
Thus we can say that in the presence
of price distortions price mechanism is not helpful for the proper allocation
of resources.
ii.
------Production externalities.
Externalities: ------ exist
when the level of consumption and production ( by some consumer and producer)
has a direct effect on the welfare of another consumer and producer.
In market economy, resources are allocated under the disguised of
self interest, but while so they hardly care of production externalities, as
any person who starts some chemical plant in the hope of maximizing its profit
but it may create a lot of problem and noise pollution to others.
iii.
---------Ignoring of opportunity costs
Each resources has some opportunity cost, i.e(the best alternative
forgone). Again if with iron, the refrigerator is produced while the production
of power looms is sacrificed, this will be the improper allocation of
resources.
iv.
---- ignore the production of social goods.
A lot of goods which are concerned with social welfare, like
educational institutions, hospital, roads, etc: are not produced by anybody
because there is no profit motive, this reflects the un-optimal allocation of
resources.
Conclusion------- the
above discussion is shows that the resources allocation, just on the basis of
prices will be an optimal one. There for regarding the proper allocation of
resources, state interference becomes inevitable.
2.
------The influence of the price Mechanism on investment direction.
Investment definition----- According to the Jhon Robinson to make expenditure on those goods
which produce income is called investment.
Now we see what role is played by
prices in determing the investment.
As we know that, ---- investment
depend on…..i) (MEC) and
ii)-----(interest rate)
------ (MEC)
mean (expected rate of profit)
An investor always compares the (MEC) and (I) becoz both are the
ingredients of the price system. The investment will continue to be made till
both are equal.
Example------ if the rate of
interest on capital is 10% and (MEC) in cotton industry is 20% investment will
made in the cotton industry; and vice versa. The investment will continue to be
made till both are equal (MEC=i)n all this shows that both MEC and i determine
the investment direction in CAPITALISM.
Critical
analysis
i.
-----
here on the basis of self interest the investment is made in those filed where
rate of return is very high --------as the case of gold; plots etc.
All this benefits speculator at the cost of suffering of the poor.
ii.
-----
moreover, in developing countries rate of interest (i)---- is kept artificially
low and does not reflect the real value of capital and investment direction
goes on wrong way an speculator earn more profit through (MEC).
3.
Price system influence and production technique.
Various methods are used to produce
any commodity, such as
i.
-----
Labor intensive technique (more labor is used as compare with other f.o.p)
(factor of production)
ii.
-----
Land intensive technique-------(more land is used as in PAKISTAN)
iii.
-----
capital intensive technique-------(more capital is used as in USA, UK, etc)
Now question arises which technique
of production will be followed, it depends upon the prices of F.O.P----which
F.O.P is cheaper will use.
Example
i.
------
In Pakistan labor and land would used because these are cheaper as compare with
capital and entrepreneur.
ii.
------
In AMERICA APITAL is used and they buy the labor from other countries, hence
price mechanism affects production techniques.
Critical
analysis
There is the operation of market imperfections and international
influences. In the countries like Pakistan where the population growth rate is
3%, need is to follow labour-intensive technology. But in our economy, there is
ruthless craze to pursue capital-intensive technology. So in the presence of
this situation the least cost factor combination could not be attained and the
welfare of consumers will come down.
4.
------Influence on the consumption pattern
The consumption pattern in the
capitalistic economy is also solved by the free play of the forces of demand
and supply.
The producer will produce only those
goods which consumer wants, and he is ready to pay the prices.
Example; the consumer want motor cycle,
the producers will produce the required commodity as the demand of any
commodity increases, its supply and prices also increases. So we can say,
consumer preference, along with the token of prices and cost of production
determines the consumption pattern of the people.
Critical
analysis
In the market economy, consumer is the king, but now-a-day the
reverse situation is occoured, he is no more king his preference are determined
by the advertisement.
5.
--------- Influence of price mechanism on income distribution
The national income f any country is the result of joint effort
factors of production (these are land, labour, capital, and entrepreneur).
Now the question is how price mechanism distributes national income
among them. In this connection price mechanism presents very simple rule of
demand and supply.
Example: -------
The factor whose demand is more than its supply its price is more.
i.
----
As the case of doctors, engineers (they earn rich salary becoz of more demand.
ii.
----the
factors whose demand is less than its supply its price is less.
As the case of unskilled labor, arts graduate, (they earn poor
salaries)
Note; same principle is applicable in case of other factors of
production.
Critical
analysis
i.
----
the above discussion shows if a person is born in poor family or fails to get
the necessary opportunities to earn money----his share is less in (NI) AS PER
RULE.
ii.
-----the
simple rule of demand and supply can exist in the presence of perfect
competition, but there prevails imperfect competition in factor markets.
And becoz of these reasons disparities prevails in the capitalistic
economy.
6.
------- influence on foreign trade
The problem of expert and import of goods from one country to
another is also settled by the operation of price mechanism.
Example
Those ommodities are produced more easily are exported and other
can be imported (AS PAKISTAN), export cotton and import industrial goods and
(vice versa)
So we can say that difference of prices make demand and supply
equal.
Critical
analysis----
i.
----
The rich industrial nations like AMERICA, UK are having monopolies in certain
technologies. They charge extraordinary higher price, so price mechanism cannot
play its role.
ii.
-----
in developing countries like(PAKISTAN) exports of these countries are mostly
agricultural goods and prices of these goods are very low, and in this way they
pa much and get less and their (B.O.P) balance of payment------remain in
deficit.