Ways Of Price Determination
- Price mechanism
Under this, the price of the market is determined by the free interaction of the forces of demand and supply and hence determined at the point where the demand and supply curve intersect or meet.
- Sale Auction
The price is determined through bidding; therefore it is determined by the highest bidder
This is through bargaining.
- Re sale price mechanism.
Under this the price of the product is determined by the producer.
- The price can as well be determined by the government and this can either be a maximum or minimum price.
- Price ceiling (maximum price) is the price which is set by the government below the equilibrium price, this is normally done during the period of shortage, when price of essential goods are excessively high. Therefore it aims at protecting consumers against such excessively high price.
Effects of Price ceiling
- Demand will increase (to ) hence a shortage (Q1-Q2)
- Supply will decrease ( to
- Black market – sellers are going to sell products in order to create an artificial shortage
- Corruption & far nism- they will sell the product to those who are willing to buy.
Advantages of price ceiling
- It helps to control inflation.
- It reduces exploitation on the consumers.
- It allows consumers to easily access essential goods at affordable prices during periods of shortage.
- It helps the government to win more support.
Disadvantages of Price Ceiling
- Discourages producers.
- It is expensive to administer.
- It creates black market
- Minimum Price ( Price Floor)
This is the price which is set by the government above the equilibrium price. It aims at motivating producers after realizing that, the prevailing market price is low.
- Effects of Price Floor
- Supply increases from to
- Demand decreases from to
- Sellers will be tempted to decrease price in order to get rid of surplus.
- It helps to improve the standard of living of workers.
Disadvantages of Price Floor
- Over production
- It results into cost-push inflation.
- It can cause unemployment.
- In case of minimum wage discourages investments.
THEORY OF MARKET
Meaning of market
Market refers to a situation where buyers and sellers are in close contact exchanging goods and services and the price of the commodity is being determined. Market can be a place or process.
Determinants or Essentials of a market
- Presence of a commodity
In a market there must be commodities which have been brought for sale.
- Presence of Buyers
The people who are able and willing to purchase the commodities being sold at a particular price and time.
- Presence of sellers.
The people who have brought their commodities for sale.
- Location or Presence of an area (region)
Refers to a particular locale where the transactions are taking place.
- The Price
One price should prevail for the same commodity at the same time.
Extent of the Market
Refers to the size of the market. The market may be wide or narrow.
The size of the market depends on the following factors;-
- Character of the commodity
In order to have a wide market a commodity must be;- (i) portable (ii) durable (iii) suitable for sampling, grading and exact description and (iv) such as its supply can be increased such commodities are wheat, gold, government securities etc.
Bulky articles like brick and perishable articles like fresh fruits and vegetables have a narrow market.
- Nature of Demand
A commodity which is in universal demand e.g. gold & silver will have a wide market. Similarly, a commodity of general consumption has a wide market.
- Means of transport and communication
The size of the market depends upon the extent to which means of communication and transport have been developed. Properly developed transport and communication systems enable commodities to be carried long distances and establish wide contact. Thus widen the market.
- Peace and security.
Obviously, goods cannot be marketed in distant places unless peace and order prevail in war time. Due to insecurity in war zones, markets get restricted. The extent of the market depends on the peace prevailing in the region.
- Currency and credit system.
If the currency and credit system of the country are well developed, marketing can be conveniently and profitably carried on over extensive areas. The extent of the market depends on the state of the currency and the confidence it inspires.
- Policy of the state.
Markets may be restricted by the policy of the state. Prohibitive duties and quotas restrict the market. The zoning system eg: wheat zones, which allow free movement of goods only within a certain zone has the same effect. Thus the government policy can also affect the extent of the market.
- Degree of Division of labor
We know that division of labor is limited by the extent of the market. The converse of this is also true. That is the extent of the market also in its turn depends upon the degree of division of labor. The greater division of labor, the cheaper the articles and wider the market.
FUNCTIONS OF A MARKET.
- It facilitates the transaction by providing opportunity of buying and selling goods.
- It serves as an outlet for the goods produced by various manufacturers.
- It is a source of supply of goods of own consumer choice.
- It helps to establish contact among buyers and sellers
- It helps to maintain prices at a specific level
- The market for a commodity helps to determine the demand for that commodity. A greater demand encourages firms to produce more hence increase in production.
TYPES OF MARKETS
There are several ways of classification of markets. Some of these types are;-
- Classification of a market according to what is bought and sold
- Product market: Deals with selling and buying of final goods.
E.g.: markets of sugar, rice, beans, etc.
- Factor market: Deals with buying and selling of factors of production.
E.g. labor market, capital market, and market for land
- Financial market: Deals with selling and buying (exchange) of currencies.
The currencies are being sold and bought. E.g. market for foreign currency in Bureau de change.
B. Classification of markets according to the place where the product is bought and sold.
- Local market: This occurs when a commodity is produced and
Sold around the area of its production. Ego, local brew like “mbege” is sold around the areas of its production.
- National market: It occurs when a commodity is bought and sold within the country e.g. a commodity which faces a national market is soap found throughout Tanzania.
- International market: It occurs when a commodity is bought and sold
In many countries of the world e.g. medicines fetch international market.
- Classification of a market according to commodity.
- General market: This type of market occurs when various commodities are bought & sold at any specific area. E.g. we can say Kariakoo is a general market.
- Specific market: It occurs when only one kind of commodity is being bought and sold at a particular place. E.g. Dares salaam stock Exchange (DSE) where shares are only bought and sold.
- Grading market: This is a type of market which occurs when any commodity is sold & bought according to its grade.
- Classification of markets according time.
- Day to day market: This type of market which occurs when the price of any commodity is determined according to demand and supply conditions of that particular day.
E.g. Saturday market, Wednesday market, It means supply can be increased beyond the existing stock of that commodity.
- Short period market: It occurs when the price of a commodity is determined according to supply and demand conditions of that short period of time. In the short period a firm can have the variable inputs like labor, raw materials etc. In this case, the supply can’t be increased beyond the existing capacity of the present firms.
- Long period market: This kind of market occurs when the price of a commodity is determined according to the long run demand and supply conditions. In the long run period it is to change the amounts of factors of production such as establishing new firms, construct buildings etc.
- Classification of a market according to situation & structure of market.
Market is based on the buyers and seller (degrees, types of commodities which are differentiated, and if there are some barriers). Based on this classification, markets have the following structures;-
- i) Perfect market structure
- ii) Imperfect market structure
This refers to the conditions under which the market operates. This is classified based on;
- The number of buyers and sellers
- Nature of the commodity(homogeneous or differential
- Freedom of entry and exist
- Knowledge of the market situation.
Basing on the classification of the following out of the market structure
- Perfect market (perfect competitive market)
Perfect market structure
A perfect market structure is the type of market structure with high degree of competition in the market.
A market issued to be perfect is when all the potential sellers and buyers are promptly, aware of the price to which transactions take place.