A MOMENT WITH JAMES SORIE SAMURA

• Define price mechanism
• Explain functions of price mechanism
• Explain factors that helps in determining prices of goods and services
• Define trade-by-barter
• Explain problems of trade-by-barter
• Define money
• Define types and functions of money

PRICE MECHANISM

The interaction of buyers and sellers in free markets enables goods, services, and resources to be allocated prices. Relative prices, and changes in price, reflect the forces of demand and supply and help solve the economic problem. Resources move towards where they are in the shortest supply, relative to demand, and away from where they are least demanded.

FUNCTIONS OF PRICE MECHANISM

1. THE RATIONING FUNCTION OF THE PRICE MECHANISM

Whenever resources are particularly scarce, demand exceeds supply and prices are driven up.  The effect of such a price rise is to discourage demand, conserve resources, and spread out their use over time. The greater the scarcity, the higher the price and the more the resource is rationed. This can be seen in the market for oil. As oil slowly runs out, its price will rise, and this discourages demand and leads to more oil being conserved than at lower prices. The rationing function of a price rise is associated with a contraction of demand along the demand curve.

• Prices serve to ration scarce resources when demand in a market outstrips supply.
• When there is a shortage, the price is bid up – leaving only those with the willingness and ability to pay to purchase the product. Be it the demand for tickets among England supporters for an Ashes cricket series or the demand for a rare antique, the market price acts a rationing device to equate demand with supply.
• The popularity of auctions as a means of allocating resources is worth considering as a means of allocating resources and clearing a market.

• THE SIGNALLING FUNCTION OF PRICE MECHANISM

Price changes send contrasting messages to consumers and producers about whether to enter or leave a market. Rising prices give a signal to consumers to reduce demand or withdraw from a market completely, and they give a signal to potential producers to enter a market. Conversely, falling prices give a positive message to consumers to enter a market while sending a negative signal to producers to leave a market. For example, a rise in the market price of ‘smart’ phones sends a signal to potential manufacturers to enter this market, and perhaps leave another one. Similarly, the provision of ‘free’ healthcare may signal to ‘consumers’ that they can pay a visit to their doctor for any minor ailment, while potential private healthcare providers will be deterred from entering the market. In terms of the labour market, a rise in the wage rate, which is the price of labour, provides a signal to the unemployed to join the labour market. The signaling function is associated with shifts in demand and supply curves.

• Prices perform a signalling function – they adjust to demonstrate where resources are required, and where they are not
• Prices rise and fall to reflect scarcities and surpluses
• If prices are rising because of high demand from consumers, this is a signal to suppliers to expand production to meet the higher demand
• If there is excess supply in the market the price mechanism will help to eliminate a surplus of a good by allowing the market price to fall.

• THE INCENTIVE/TRANSMISSION OF PREFRENCE FUNCTION OF PRICE MECHANISM

An incentive is something that motivates a producer or consumer to follow a course of action or to change behaviour. Higher prices provide an incentive to existing producers to supply more because they provide the possibility or more revenue and increased profits. The incentive function of a price rise is associated with an extension of supply along the existing supply curve.

• Through their choices consumers send information to producers about the changing nature of needs and wants
• Higher prices act as an incentive to raise output because the supplier stands to make a better profit.
• When demand is weaker in a recession then supply contracts as producers cut back on output.
• One of the features of a market economy system is that decision-making is decentralized i.e. there is no single body responsible for deciding what is to be produced and in what quantities. This is a remarkable feature of an organic market system.

FACTORS THAT HELPS IN DETERMINING PRICES OF GOODS AND SERVICES

1. CHANGE IN TASTE AND PREFERENCES OF CONSUMER

It cannot be overemphasized that the change in consumers taste for a particular goods or services can greatly affect how these goods and services are demanded and hence supply in the market. Therefore, when there is an increase in the demand of a particular goods/services due to increase in taste, there will be a corresponding increase in price for that particular goods/services as its increase in demand can lead to its scarcity in the market.

Sometimes, it may not be a change in taste but life style or trend, especially in terms of luxury.

• CONSUMER INCOME

The more the disposable income, the more the demand for goods/services or the change in consumption, hence, the increase in the price for such goods and services. This implies, consumer income, is one of the key factors that determines the price of goods and services.

• PRICE OF COMPETITORS

The price of competitors also help in determining the price of goods and services in the market. If prices of competitors are high, you may decide to price your goods and services down to attract or penetrate the market. One may also try to price goods/services high in order to give class to products and attract some special type clienteles or consumers.

• PRODUCT LIFE CYCLE

The demand of product varies over the different stages of the product life cycle. As the demand varies, the price also changes accordingly.

At each stage of the product life cycle, the number of consumer for the product changes. A demand for the product grows at the early stage of the product life cycle and decline as the product life cycle passes maturity. So does the price.

• TAX

The higher the tax levied on certain goods/services the higher the price of that particular good goods/services and vice-versa.

• SHORTAGE IN SUPPLY

When there is a shortage in supply, there is also a surplus of demand, hence an increase in price.

• PRICE OF OTHER CONSUMER PRODUCTS-SUBSTITUTES OR COMPLEMENTS

It is stated that two good goods /services are complements if the increase in price for one causes a drop in demand for the other.

Example computer and software, an increase in demand and as well as price of computers can result in an increase in demand and price of software as the two complement each other.

Sometimes, the product may be substitute, that is, when there is an increase in price and a decrease demand of one, the other will experience a decrease in price but an increase in demand. Product such as cheese and butter, beef and fish functions in such manner in price determination.

• PRODUCTION COST

The cost of producing goods/services helps in determining the price of such produced goods/services. A high cost of production means a high price for products and vice-versa.

• GOVERNMENT AND LEGAL REGULATIONS

The firms, which have monopoly in the market, habitually charge a high price for their products.

In order to protect the interest of the public, the government intervenes and regulates the prices of the commodities. For this purpose, some products are declared as indispensable products. E.g. Lifesaving drugs.

1. PRICING OBJECTIVES
2. Profit Maximisation
3. Obtaining market share leadership
4. Surviving in a competitive market
5. Attaining product quality leadership

1. MARKETING METHOD USED TO SELL THE PRODUCTS
2. Commission to be paid to middle men
3. After sales services
4. Delivery services
5. Online marketing

TRADE-BY-BARTER

DEFINITION OF TRADE-BY-BARTER

Trade-By-Barter maybe defined as a form of trading in which goods and services are exchanged directly for other goods/services without the use of money as the medium of exchange. For example if someone has gari and is in need of beans, he must look for a person who has beans and is need of gari.

PROBLEMS OF TRADE-BY-BARTER

1. PROBLEM OF DOUBLE COINCIDENCE

This involves looking for someone who is in need of what you have and at the same time has what you need. This actually results to problem in old days when there were no alternative methods.

• NO FIXED RATE OF EXCHANGE

There is the problem of exchange rate determination between two products. Different rates of exchange has to be determined for every transaction before it can take place. E.g. how much of apple can you exchange for rice?

• WASTE OF TIME AND EFFORT

Barter system leads to waste of time and effort because one has to search for somebody to exchange the good.

• PROBLEM OF INDIVISIBILITY

Many goods cannot be divided into small convenient units because when they are divided they will lose the value. These types of goods are heavy and cannot be split.

• PROBLEMS CREATED BY BULKINESS OF SOME GOODS

Some of the goods to be exchanged are so bulky that one finds it difficult to carry them about.

• NO ROOM FOR DEFERRED PAYMENT

In trade-by-barter, there is no room for deferred payment. That is one cannot collect certain goods and hope to pay in a later date. Barter requires immediate settlements.

• IT DISCOURAGES BORROWING AND LENDING

Borrowing and lending under trade by barter is particularly impossible, as there is no standard unit of measurement.

• IT DISCOURAGES LARGE SCALE PRODUCTION

As a result, in the difficulties in the system of trade by barter, it therefore leads to people producing goods just for themselves and that of their immediate family. In other words, trade by barter encourages self-sufficiency hence it limits specialization.

• DIFFICULTIES IN STORING WEALTH

The barter system unlike trade by money does not does not encourage storage of wealth. It is difficult to store wealth or value, especially where perishable goods like fresh tomatoes and onions are involved.

MONEY

DEFINITION OF MONEY

Robertson defined money as “Anything which is widely accepted in payment for goods or in discharge of other kinds of obligation.”

According to Hawtrey, “Money is one of those concepts which like a teaspoon or an umbrella, but unlike an earthquake or buttercup are definable primarily by the use or purpose which they serve.” This implies money is the value of exchange.

 TYPES OF MONEY

1. COMMODITY MONEY

This involves commodities such as cattle, grains, leather skins, utensils and weapons. However, in present time, commodity money is not preferable as it lacks certain important characteristics of money, such as uniformity, homogeneity, standard size and weight, portability and divisibility.

• METALLIC MONEY

Money made of metals such as copper, brass, silver, alloys and aluminum. The need for metallic money was realized due to the limitations of commodity money. However, the exact period when metallic money was invented was unknown. It is supposed that metallic coins were traded in India around 2500 years ago. Initially, the pieces of metal such as gold, silver, copper and aluminum served the purpose of money. However, these were replaced by coins.

• PAPER MONEY

This refers to the form of money printed, authenticated, and issued by the government of a country. Paper money is regarded as the most common form of money and constitutes a large part in the money supply of a country.

Paper money was invented as the supply of metallic coins, such as silver and gold, was very less as compared to its demand.

• BANK DEPOSITS

This refers to money that is in the form of current account deposits, saving account deposits and time deposits. This form of money was invented with the evolution of the banking system. Unlike metallic money and paper money, this form of money cannot be passed hand to hand for purchasing goods and services.

Deposits money is considered as entries in the ledger of the bank to the credit of the holder. These can only be transferred through checks.

FUNCTIONS OF MONEY

The functions of money is broadly divided into primary and secondary functions.

PRIMARY FUNCTION OF MONEY

The primary functions of money refers to the basic or original functions of money. They include:

1. MEDIUM OF EXCHANGE
2. Money functions as a mode of exchanging goods
3. The main and unique function of money is as a mode of exchange as it solve the problem of barter system of double coincidence of wants.
   1. MEASURE OF VALUE
4. Helps in determining the value of goods and services
5. The value of goods and services are expressed in terms of money
6. Money is the common denominator while measuring the value of goods and services in monetary terms.
7. It helps in comparing and calculating the exchange rates between two goods
8. Provides more meaningful accounting systems
9. Helps in determining and comparing national income of different countries
10. Helps in comparing the cost incurred on production and distribution and the revenue generated from the consumption of goods and services

SECONDARY FUNCTION OF MONEY

These are the importance of money that are obtained from primary functions. They include but not limited to the following:

1. STORE OF VALUE

Individual store wealth in the form of money. Money functions here as an asset that sustains value over a period.

• STANDARD OF DEFERRED PAYMENTS
• One of the most important functions of money
• Deferred payments refer to payment made on loans, salaries, pensions, insurance premium, interests and rents.
• The necessary condition for deferred payment is that the amount of repaid money should be the same as it is was at the time of purchase.