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Price systems regulate production and consumption by determining the value of goods. Free systems rely on supply and demand, while fixed systems are controlled by the government. Mixed systems combine both approaches and are common in modern economies.
A price system in the economy has the function of regulating the production and consumption of goods by determining their monetary or commercial value. There are three different types of these systems in economics: free, mixed and fixed. Each of these is characterized by the amount of control that non-market forces have over prices and especially over factors of production, including land, labor and capital.
All modern societies use pricing systems. They motivate both consumers and producers to make decisions. For example, in most cases, a consumer will choose the product that is the least expensive and manufacturers will choose to produce only products that will make a profit. The system informs both of these decisions without the producer and consumer having to communicate directly.
In a free system, prices are determined naturally by supply and demand in the economy without outside interference. The higher the demand for a product, the more incentive producers get, but producers are also motivated to keep prices low to attract more consumers. This creates a situation where both consumers and producers are motivated by price.
In free pricing systems, competition between producers allows prices to stabilize. These systems create capitalism, which stands out as a market where individuals are allowed to control all factors of production, without any government intervention. Profits are unlimited in free systems and are the main motivation for producers.
In a fixed price system, the market is not left to its devices; instead, prices are controlled by forces outside the economy. Fixed price systems occur in centrally planned economies where the government has complete control of all factors of production. Supply and demand do not determine prices, rather government planners decide what to produce, how much to produce and how much to charge. While the government decides what to produce in this economy, it does not change the needs of consumers, and this can result in shortages of some items and a surplus of others. These systems are more common in countries that have communist or socialist governments.
Fixed and free price systems are both extremes, one unregulated and the other completely controlled by the government. Most nations cannot exist with a purely fixed or purely free price system. A mixed price system is a combination of these extremes and produces an economy with both government regulation and free enterprise. Most modern economies have a price system that falls between a free and a fixed price system.
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