In economic use of the word demand is made to show the relationship between the prices of a commodity which consumers want to purchase at those price. Generally consumers prefer to purchase at those price. Generally consumers prefer to purchase less at higher prices and vice versa.
This relationship between demand and price can be shown with the help of an imaginary schedule as in table 1.
It would be seen from table 1 that as the price of commodity rises consumers demand less of it. Conversely if the prices of commodity falls more of it is demanded.
Thus price and demand show an inverse functional relationship.
Supply refers to the quantity of a commodity offered for sale at a given price in a given market at a given time. According to the law of supply producers prefer to sale more at higher prices and vice-versa.
Price or market mechanism is a process through which the market economy function. The market economy functions through the market forces, viz. demand and supply. The demand and supply forces interact to determine the price of goods and services. Thus the price mechanism, is the mechanism through which the price of goods and services get determined.
Definitions: it is the mechanism by whjihc prices mechanism are given below:
(1) Cairncross: it is the mechanism by which prices adjust themselves to the pressure of demand and supply and in their turn operate to keep demand and supply in balance.
(2) Ferguson: price mechanism refers to the interaction between the forces of demand and supply determining prices of goods and services and resources in different markets. The price is the amount paid for the specified quantity and quality of any product or factor.
Thus the price mechanism is used with reference to the free market system and the way in which act as automatic signals co-ordinating the action of individual decision making units.
Working of price mechanism: there are three important economic ideas that describe the way in which price mechanism works. In economic use the word demand is made to show the relationship between the prices of a commodity and the amounts of the commodity which consumers want to purchase at those price. Generally consumers prefer to purchase less at higher prices and vice versa.