What is the market mechanism?
The market mechanism is an economic term that concerns the way consumers and manufacturers ultimately determine the price of produced goods. The producers will respond to how many goods are purchased by consumers by determining the price and consumers then respond to this price. This process is tied to the laws of supply and demand, and the market mechanism helps to provide an equilibrium point in which the price keeps both sides. Governments can sometimes try to influence the economic process to try to encourage the market in a certain direction, thereby interrupting the mechanism. By studying these habits on a smaller scale, he feels that they can make the prerequisites for economic practices on a larger scale, such as the economy of the whole country. Some economists feel that the market sometimes needs some external stimulation to be able to function efficiently. Otherwise, they feel that the market mechanism eventually provides the most effective model for the production and consumption of society.
howImagine an example of how the market mechanism works that society in the United States produces a dose of 20 widgets and decides on a price of $ 100 (USD). Once the product goes to the market, only five are sold. The company responds by reducing the price to $ 50 and the remaining 15 is sold quickly. In response, the company increases the price to $ 75 and the sale then begins to reflect the level of production.
In this case, the market mechanism decided that the price of $ 75 USD was a point of equalization or equilibrium at which consumption and production connect. The company reduced the prices to stimulate the purchase and then support further production. These forces cooperate in balance in what economists call the law of supply and demand. In this way, free markets work, without external stimulation.
Whenever it attempts to external economic stimulation, the market mechanism ceases to be a decisive factor in consumption, production and price. On certain occasions, governments may try to intervene on free markets, perhaps tradeby agreement, handling of interest rates or wage laws. Proponents of these measures feel that economies sometimes need some external stimulation to work at their highest level. On the other hand, the free market supporters believe that the market itself will achieve final efficiency.