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What are the advantages and disadvantages of the price system?

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Michael Koren eNotes educator | Certified Educator

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The price system and I assume you mean the free price system, is very important in an economy. There are advantages and disadvantages to it.

In a free price system, the forces of supply and demand determine prices. The most efficient use of resources is when supply matches demand. Supply and demand are equal when the market determines the price at which a number of goods supplied equals a number of goods demanded. The price system also allows us to buy many products. Manufacturers are willing to make products when they can make money. When supply equals demand, businesses are maximizing the profit potential at the given price level.

One disadvantage of the price system is that for certain products, the costs of setting up the industry are so high, there is only one seller of the product. In cases like these, such as with the electric and the natural gas companies, or with the water companies, without government regulation, prices could be very expensive since they are the only provider of the product. In these cases, the government needs to regulate these industries because the price system would lead to very high prices for water, electricity, and natural gas. Since the setup costs for these industries are so high, there is no competition for these companies. This could cause consumers to make some very difficult choices if the prices are regulated by the government.

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Madeleine Wells eNotes educator | Certified Educator

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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 by pohnpei, 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...

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pohnpei397 eNotes educator | Certified Educator

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