What are the advantages and disadvantages of the price system?
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In the price system, prices are used to determine what goods and services are produced and who gets them.
There are at least two major advantages to this. First, it allows consumers to decide which things they want to buy. They choose to buy or not to buy a given product at a given price. This gives them the greatest control over their economic lives. Second, it allocates resources efficiently. Prices send strong signals about what is wanted and what is not. Suppliers respond to these prices automatically. This is much more efficient than a system in which a government tries to determine what is and is not needed and adjusts production accordingly.
The major disadvantage of the price system is that it prevents poor people from getting the things they need. Prices essentially ration goods on the basis of ability to pay. When people cannot afford to buy necessities, they are denied access to those goods. This can be seen as inequitable.
The price system is the price mechanism in a free market economy. Profit is the main motivation for businesses, and consumers are free to buy any good or service they choose. Equilibrium is achieved when supply equals demand for a product.
Besides the two advantages of the price system described above, another advantage is that the price system encourages competition. Technically, a free market economy is essentially one without government intervention, although a strict example of this would be hard to find in the world today. Going back to competition, we see that when companies have to compete with other companies for market share, it is more likely that these companies will try to produce better products and sell those products at optimum prices to potential and current customers. Companies allocate financial resources toward more research and development (R&D) hoping to gain advantage in terms of an increased customer base. Customers benefit because more variety and better quality products may increase their quality of life. In the medical field, competition has fueled great medical breakthroughs and advantages for patients. This link lists the top 10 medical breakthroughs for 2015 according to 110 medical experts. (Note: click on each image for a short video)
A disadvantage of the price system is the possibility of large scale unemployment in different market sectors due to automation.
As more and more companies automate in order to increase production efficiency, workers are disenfranchised. Job losses may contribute to financial insolvency and this can affect the overall health of the economy.
Another disadvantage of the price system is that both good and harmful products can be sold side by side: for example, consumers can purchase as many cigarettes as they desire even though smoking may have a detrimental effect on their health.
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