What is Price System
Price system is an economic system by which the production, distribution, consumption, investment and overall economic activities of a society are conducted in a capitalist economy. In a capitalist economy, everyone performs economic functions independently. But even if economic activities are conducted according to the wishes of different people, the capitalist economy cannot be called 'undisciplined'. Because, in capitalist economy, the independent and behavioral activities of different people are managed and controlled by an 'invisible hand'. In the words of economist Adam Smith, "The 'invisible hand' that influences and controls the work of different people is called the price process." In this process, the prices of different commodities in the market, their demand and supply, are determined automatically in response, and the production, distribution, consumption and investment are conducted as a result of low or high prices of the commodity. In a capitalist economy, what goods will be produced, how much will be produced, how it will be produced, how much will be consumed, etc., are all determined by an automatic pricing system. In the capitalist economy, this invisible force that controls production, distribution, consumption and investment is called the 'price system'.
How this automated pricing system plays a role in production, exchange, distribution and consumption in a capitalist economy is discussed below:
(1) In the case of consumption: The role of the price system is very important in the case of consumption in a capitalist economy. In a capitalist economy, how much a buyer or consumer will buy depends on the price of different goods. The purpose of every consumer or buyer is to get maximum satisfaction from his limited income. For this reason, the buyer buys a product only when he gets the same benefit as the price of the product. So, the amount of goods a buyer or consumer will buy depends on the price system.
(2) In the case of production: In a capitalist economy, the goal of every producer is to make the most profit. The producer will produce the goods which will increase the profit of the producer. Again, profit depends on the price of the product. If the price is higher, the profit will also be higher. So, the manufacturer decides how much a product will produce depending on the price of the product.
(3) In the case of distribution of income: The price system also plays an important role in the distribution of income in a capitalist economy. In the economy, ‘income flow’ rotates in a cycle. Producers employ different components in the field of production, sell all the goods they produce, the price or income they get goes back to the consumers as the production price. In a capitalist economy, the link between the income of producers and the income of consumers is established through the price system.
(4) Determining the method of production: The price system also has an important effect on the method of production. There can be multiple alternative methods of producing a product. The producer follows the method in which the cost of production is minimized.
