Top 6 Strengths of the Market Mechanism | Price System

The following points highlight the top six strengths of market mechanism. The strengths are:  1. Coordination of Decentralized Decision 2. Rations Goods and Resources 3. Gives Signals to Product Goods 4. Gives Signal to Investment 5. Determines Income Distribution 6. Freedom of Enterprise.

Market Mechanism: Strength # 1. Coordination of Decentralized Decision:

In a market economy, one encounters thousands of markets where millions of people interact. We have seen that, in the market economy, price-output decisions are determined by the interaction of the abstract forces of demand and supply in the absence of any government or individual control.

The price system is viewed as an automatically functioning and self-enforcing social control mechanism. In the absence of an expensive central planning authority of governmental/bureaucratic control, price mechanism efficiently coordinates the decentralized decisions of consumers and producers. In view of this advantage, some people call price system as the Eighth Wonder of the world.

Market Mechanism: Strength # 2. Rations Goods and Resources:

It serves as a means of rationing scarce goods among consumers and scarce resources among producers.

It may happen that due to certain unforeseen conditions supply of a commodity may drop. So, it has to be rationed among many consumers. Price will now automatically rise. As price rises, demand for it contracts. Thus, high price enables consumers to ration out scarce goods.

Similarly, price mechanism encourages firms to conserve scarce resources. An input short in supply will result in high price. Because of its price, producers would be discouraged to use it freely.

Market Mechanism: Strength # 3. Gives Signals to Product Goods:

It gives signals and incentives to produce goods that consumers like. If people want more cars, TVs, books, etc., prices of such items would rise and the firms would be encouraged to produce these goods more.

Market Mechanism: Strength # 4. Gives Signal to Investment:

A related advantage of this is that the price mechanism provides incentive to firms where to invest and where not to invest, and, hence, what to produce and what not to produce. In other words, investment possibilities of firms are influenced by price mechanism.

Market Mechanism: Strength # 5. Determines Income Distribution:

It determines distribution of income among input owners.

Market Mechanism: Strength # 6. Freedom of Enterprise:

A producer has the complete freedom of what to produce and what not to produce. Government does not intervene. Likewise, a consumer is free to decide on his purchase. No individual or governmental officials dictate while purchasing commodities or choosing occupations or saving income for future.

As people enjoy economic freedom under market mechanism, a market, economy is called a laissez-faire economy in which there is freedom of enterprise and sovereignty of consumers.

In view of these advantages, one may quote.

Theodore Yutena’s praise towards the price system:

“Beyond question, the price system is the greatest achievement of man in social, economic and political organization. It enables people to work together; it makes them help each other while seeking to help themselves; it permits individuals to express their varied wants and satisfy them by exchange beneficial to themselves and other parties; and most important, it obviates strife and the exercise of power. It is the only system in the modern world in which men can be free and peaceful.”