- noun a system in which decisions about production quantities and selling prices are determined by buyers and sellers in a market.
- (written as Price Mechanism)The market mechanism that sends price signals to producers about what to produce, to labour about whether to work and at what, and that allocates goods and services amongst consumers. Markets and the rules by which they operate are human creations and, in practice, are rarely perfect (not only in design but also in execution, since their operation is itself costly). It is usually assumed (by economists) that prices settle in an equilibrium from which they are disturbed by ex- ogenous shocks. Provided the system as a whole is stable, a new equilibrium is expected to be established. The remarkable feature of this mechanism is that it works without any general external control or planning mechanism other than the existence (and enforcement) of exchangeable private property rights in goods and services, which define the uses to which the goods and services may be put (the so-called 'invisible hand') and the terms on which they may be traded. There are many reasons why any particular market system may be very slow to adapt to change, which are as fascinating to contemplate as is the 'invisible hand' itself. One should not jump to the conclusion, simply because a particular price mechanism operating in a particular market with its particular set of (human made) rules actually succeeds in allocating resources, that it does so in the best imaginable (or even best practically possible) way. Nor ought one to swing violently the other way and assume that markets are always and everywhere pernicious inventions.
- synonymMarket Mechanism
- noun the shifting of prices in a market according to, and affecting, supply and demand