Price Determinations

The type of market in which goods and services are exchanged plays a major role in determining their prices.

In a regulated market, prices are determined through price legislation introduced by the government. However, in a free market economy, prices are determined by the interaction of the forces of demand and supply.

Price Legislation

Price legislation refers to government laws that fix the price of certain goods either above or below the equilibrium price.

Minimum Price Legislation

This is a government policy that sets the lowest price at which a good or service can be sold, usually above the equilibrium price. An example is minimum wage for labour.

Effects of Minimum Price Legislation

• Decrease in demand.
• Increase in supply.
• Creation of surplus (excess supply over demand).
• Possible gluts and retrenchment of workers.

Maximum Price Legislation

This is a government policy that sets the highest price at which a good can be sold, usually below the equilibrium price. It is commonly applied to essential goods and food items.

Effects of Maximum Price Legislation

• Increase in demand.
• Excess demand over supply.
• Reduction in supply.
• Shortages, hoarding, and black market activities.

Functions of the Price System

• Assists in allocating scarce productive resources efficiently.
• Encourages adjustment over time in response to market changes.
• Reflects the income level of consumers.
• Helps prevent exploitation of consumers.
• Helps maintain balance between demand and supply in the economy.
• Ensures proper rewards to factors of production (land, labour, capital, and entrepreneurship).