FREE PRICE SYSTEM

Advantages and Disadvantages of the Free Price System

Advantages and Disadvantages of the Free Price System

Introduction

The determination of process through demand and supply contact is free price system. There is a transfer of price change information in price signals among consumers and producers in market competition and allocation of resources. A free price system or free price mechanism (informally called the price system or the price mechanism) is an economic system where prices gets allocated in positions by the interchange of supply and demand. The resulting prices get the recognition as signals which gets communicated between producers and consumers which serve to guide the production and distribution of resources. A free price system contrasts with a controlled or fixed price system where prices gets allocated by government, within a controlled market or planned economy. In this essay, the advantages and disadvantages of free price system are critically discussed.

Advantages of Free Price System

There are many advantages of the free price system. One advantage is that it transmits signals of the prices between producers and consumers. Practically, this indicates that there are numerous production factors for different intervals of time. This impacts the goods' marginal costs and results in a cost of production. Alternatively, the consumers decide according to their own reasoning, if they want to buy the product in the specified price and the products quantity. The changeable relation between the product's price and quantity would be the outcome of the signals of the price, which continuously transmit among the numerous agents of economics in the form of producers and consumers (Macleod 2007, 103).

Economic freedom is necessary for openly making decisions of the producers regarding the production, price and quantity of the goods. A direct interaction occurs among the producers and consumers with the help of the free price economic system. This system also provides the producers with guidance in the pricing signals, in the system of free price.

The consumers and the producers get such form of freedom, and it enlightens their self-interest that allows them with the allocation of frequent resources through invisible hand. This metaphor has been used by Adam Smith and refers to the act of individuals which purse their self-interest (Ahamed 2010, 64). When the external regulation is absent, the market is guided internal forces by an invisible hand as a result, the markets become self-regulated which enables them the allocation of the efficiency of the limited resources.

Another argument on the allocating means of the limited sources is through arranging the system of economics from the top central structure and from where the authorities decide the goods which are in need, produced, from where, whom and at what price. While, the state fixes the prices of the goods and resources, they also make the strategic decisions regarding the economic development, distribution and planning. During this entire process, there is not any communication among consumers and producers. (Ahamed 2010, 64)

The State, itself, replaces and signals the price according to its own random fixing of the price, instead of ...