Question

Discuss the advantages and disadvantages of the price system

Answer 1

In the price system the prices are determined by market forces. What this essentially means is that there are forces of supply and demand which would decide where the price would go.

To explain it simply put:
If there is a product which is 1 in quantity by the only seller and there are 100 buyers for it, the seller would inevitable ask for a better price for the product. This would mean that the price would increase for the product.

Similar If there is a product which is 100 in quantity by the only seller and there is 1 buyer for it, the seller would inevitable want to sell it. This would mean that the price would decrease for the product as there is only 1 buyer.

Advantages of the price system are that the price determination is not impacted by external forces and is being done in a very transparent manner. There is no compulsion on either the buyer or the seller to buy/sell goods. It is a very coherent and the most simple form of market price determination.

Disadvantages are that if there is something i.e. called as hoarding of goods where the seller, to decrease the supply and hence artificially portray as if there are less products, to increase the price, then it is illegal and can hurt the market price determination. Also big players in the market tend to initiate other strategies such as hoarding, influence etc. to impact the price determination. The problem with this is that the retail person is hit in the process. Thus the efficient market price system no longer is valid here.