Price means the sum of money that is paid for goods and services that are purchased or enjoyed at one time or the other.
Without doubt,it is obvious that some payments are not called prices. Among these are the fare that is paid for journey as a means of transportation, the wage that is paid for taking advantage of labour, the rent that is paid for the use of land,the interest that is paid for the enjoyment of capital and so on.
Now, whether the payment is called price or something else, one thing that is certain is that price can be paid for consumer goods or paid for factors of production.
THE INTERACTION BETWEEN DEMAND AND SUPPLY
In the price system, the price determines the goods and services that will be produced and the quantity of such goods and services that will be produced. Not only,the price facilities the distribution of goods and services among those who want them as well as the distribution of factors of production among the business men. The price system is highly operative in the capitalist countries such as the United State and a host of others.
However, it is possible for a country to run an economy that is devoid of the influences of the price system. In this case,the state determines the goods and services that will be produced, how scarce resources will be allocated among the manufacturers and how the goods and services produced Will be distributed. This situation is the case in the socialist countries. Countries such as China,Russia and a host of others are in the category.
PRICE DETERMINATION UNDER PERFECT COMPETITION
Price determination implies how the price of a commodity is determined in the market. In a perfectly competitive market, the fixing of prices takes place in the atmosphere of pure competition. In this case,the price is naturally subjected to upward and downward adjustment in order to attain equilibrium or balance.
THE EQUILIBRIUM PRICE AND QUANTITY
The equilibrium price is the price at which demand and supply are equal. The interaction of demand and supply determines what the price of a commodity will be. In other words,the quantities demanded and supplied continually react to each other until a stable equilibrium price is attained.
If demand exceeds supply, the price of a commodity will rise and the consumers will not be comfortable. They will be forced to demand less.
On the other hand,if supply is greater than demand, the price will fall and the suppliers will not be at ease. They will be compelled to reduce supply. The two situations described will continue to be occasioned until stable equilibrium price and equilibrium quantity are attained.
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