THE THEORY OF DEMAND
Price Determination
Price In a market economy, Price is the amount of money paid for a particular good or service at a particular time. If Mr. Y buys a pair of shoes for 2000 FRS then 2000 FRS is the price of that shoes or the exchange value of the shoes. This price is the money value of the goods and services. In a barter economy, price of a product is the amount of goods exchange for another goods e. g. exchanging a bucket of beans for a bunch of plantain.
Price determination: It is the method used to determine the price of goods and services.
Methods of price determination
There are three methods used to determine prices of goods or services. These include;
- Auction: It is a system where goods are given to the highest bidder. The highest bidder is the person who pays the highest price during and auction sales.
- Rationing: It is a system where goods in shortages are distributed (rationed) by the government. It is usually comes as a result of maximum price control.
- Price system (invisible hand): It is a system where the prices of goods and services are determined by the forces of demand and supply.
Value: It is a paradoxical tem It can either be value in use or value in exchange.
Value in use is the amount of satisfaction derived from using a product at a particular time.
Value in exchange is the economic worth of a product measured in terms of money at a particular time.
Paradox of value: Paradox of value explains that some goods with high value in use have low value in exchange e. g. water because they are abundant while some gods with low value in use have high value in exchange e. g. Diamond, gold, silver etc. because they ate scarce and yield higher utility.
