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I'm doing AS economics. Does anyone know the difference between market forces and the price mechanism? - Kris - 01-23-2013 07:20 PM
If you could explain this in simple English, I would be very grateful.
- JD - 01-23-2013 07:28 PM
They are very similar.
The price mechanism refers to the use of prices to determine the allocation of resources. In other words, how do we know how much of any thing needs to be produced, and how do we know it is being produced in a cost effective manner? Price tells us.
As an example, Why doesn't a new car cost $1,000? Because, the price mechanism would tell everyone involved in the transaction that it is a poor allocation of resources. The scarce resources of steel, aluminum, plastic, glass, labor, etc in the car could be used by other manufacturers to make things people needed more? How do we know? Price. The fact that we are willing to pay $20,000 or more for a new car is a signal to manufacturers that the we as consumers are willing to accept the cost of resources necessary to make a car, and we will forego the alternative uses of the factors of production.
When we say, "market forces," it is a more general description of the collective pressure of individual economic decision makers minimizing their opportunity costs. In other words, individuals make decisions about what to buy and produce with an overall desire to optimize their personal satisfaction. The sum total of all of those decisions creates signals that impact the allocation of resources. Market forces may be affected by prices, but individuals might be influenced by factors that do not carry an explicit price with them, such as: the desire for leisure, job satisfaction, convenience, social convention, etc.