• PRICE MECHANISM AND PLANNING
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DEVELOPMENT ECONOMICS
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DR SHASHI AGGARWAL
• MEANING OF PRICE MECHANISM
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DETERMINATION OF PRICES OF ALL GOODS
AND SERVICES BY THE INTERACTION OF THE
FORCES OF DEMAND AND SUPPLY WITHOUT ANY EXTERNAL INTERFERENCE
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AT ANY GIVEN TIMES SELLERS ARE
WILLING TO SELL DIFFERENT QUANTITIES OF COMMODITY AT DIFFERENT PRICES
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BUYERS ARE READY TO BUY DIFFERENT QUANTITITES AT DIFFERENT PRICES
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THEY WILL BUY MORE AT LOW PRICES
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PRICE WILL BE DETERMINED IN THE MARKET AT WHICH THE DEMAND FOR THE
COMMODITES WILL BE EQUAL TO SUPPLY
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PRICE MECHANISM REFERS TO THE SYSTEM WHERE THE FORCES OF DEMAND AND SUPPLY
DETERMINE THE PRICES OF THE COMMODITIES AND CHANGES THERIN. IT IS THE BUYER AND
SELLERS WHO ACTUALLY DETERMINE THE PRICE OF A COMMODITY
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PRICE MECHANISM IS THE OUTCOME OF THE FREE PLAY OF THE MARKET FORCES OF
DEMAND AND SUPPLY.
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SOME TIMES THE GOVERNMENT CONTROL THE PRICE MECHANISM TO MAKE COMMODITES
AFFORDABLE FOR THE POOR PEOPLE.
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PRICES OF GOODS EXPRESS THEIR EXCHANGE VALUE. PRICE ARE ALSO USED FOR
EXPRESSING THEIR VALUES OF VARIOUS SERVICES RENDERED BY DIFFERENT FACTORS OF
PRODUCTION SUCH AS LAND,LABOUR,CAPIAL AND ORGANIZATION IN THE FORM OF
RENT,WAGES,INTEREST AND PROFIT.
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A FREE MARKET IS ONE IN WHICH THE FORCES OF
DEMAND AND SUPPLY ARE FREE TO TAKE THEIR OWN COURSE.A FREE MARKET IS ONE
IN WHICH THE FORCES OF DEMAND AND SUPPLY
ARE FREE TO TAKE THEIR OWN COURSE. NO INTERVENTION FROM OUTSIDE.
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BUT SOMETIMES GOVERNMENT INTERVENES AND DTERMINE AND INTERVENE AND DTERMINE
THE PRICE EITHER FULLY OR PARTIALLY. FOR EXAMPL THE GOVERNMENT OF INDIA FIXES
THE PRICES OF WHEAT,RICE SUGARCANE ETC IN ORDER TO PROTECT THE INTRESTS OF BOTH PRODUCERS AND CUSTOMERS
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MANY ECONOMISTS LIKE GOOSEN,CANON ,MISERS--- IN CASE OF ECONOMIC PLANNING
PRICE MECHANISM IS NOT POSSIBLE
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MANY ECONOMISTS LIKE OSCAR LANGE- EQUILIBRIUM PRICES AREE A MTTER OF FACT
ACCOUNTING PRICES
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OPERATION OF PRCICE MECHANISM IS
POSSIBLE UNDER ECONOMIC PLANNING
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DETERMINATION OF PRICES-A GENERAL VIEW
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IN OPEN AND COMPETITIVE MARKET, IT IS
INTERACTION BETWEEN
DEMAND AND SUPPLY THAT TENDS TO DETERMINE THE EQUILIBIRIUM PRICE AND QUANTITY.
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EQUILIBRIUM MEANS REFERS TO STATE OF MARKET IN WHICH THE QUANTITY DEMANDED
IS EQUAL TO QUANTITY SUPPLIED OF THE COMMODITY
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EQULIBIRUM PRICE IS DETERMINED WHERE DEMAND IS EQUAL TO SUPPLY
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DETERMINATION OF PRICE
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EXPLANATION
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ANALYSIS OF THE TABLE INDICATE AS THE PRICE GOES ON INCREASING THE QUANTITY
GOES ON DECREASING. INDICATE PRICE AND QUANTITY DEMANDED ARE INVERSELY RELATED
WITH EACH OTHER.
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AS THE PRICE GOES ON INCREASING THE SUPPLY ALSO GOES ON INCREASING WHICH
INDICATE THE POSTIVE RELATIONSHIP BETWEEN PRICE AND THE SUPPLY.
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THE PRICE 3 WILL BE THE EQUILIBIRIUM WHERE DEMAND AND SUPPLY BOTH ARE EQUAL
TO EACH OTHER
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GRAPH
• D
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OBJECTIVE
- THE MAIN FUNCTION: IS TO MAXIMZE PRODUCTION AND PRODUCTION CAPACITY IN
ESTABLISHING BETWEEN DEMAND AND SUPPLY.
- PRICE MECHANISM ACTS AS REGULATOR OF ECONOMIC ACTIVITIES
- DIFFERENT KINDS OF EQUILIBRIUM ARE ESTABLISHED
- PRICE MECHANISM IS LIKE AN EFFICIENT CALCULUS.
- OPTIMUM ALLOCATION OF RESOURCES
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BASED ON CERTAIN ASSUMPTIONS :
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PERFECT COMPETITION IN FACTOR MARKET AND PRODUCT MARKET
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FREEDOM TO TAKE DECISIONS
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LACK OF GOVERNMENT INTERFERENCE
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ECONOMIC PLANNING
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ECONOMIC PLANNING IS A PROCESS UNDER WHICH A CENTRAL AUTHORITY LIKE PLANNING
COMMISSION IN INDIA DEFINES A SET OF
TARGETS RELATED TO GROWTH AND DEVELOPMENT OF THE COUNTRY TO BE ACHIEVED WITHIN A SPECIFIED TIME FRAME
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CONCEIVED BY SOVIET UNION IN 1928
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MODEL OF ECONOMIC PLANNING WITH STATE AS THE OWNER OF MEANS OF PRODUCTION
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WHERE FREE PLAY OF THE MARKET FORCES WERE DISCARDED. RELATIVE PRICE
STRUCTURE WAS DETERMINED BY THE CENTRAL AUTHORITY IN ACCORDANCE WITH THE
OBJECTIVE OF MAXIMIZATION OF SOCIAL WELFARE AND MAXIMIZATION OF PROFITS.
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PRICE MECHANISM AND ECONOMIC PLANNING
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PROF H.H GOSSEN,KEYNES,HAYEK AND MISES PRICE MECHANISM IS NOT POSSIBLE UNDER
ECONOMIC PLANNING
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REASONS :
- OPERATION OF PRICE MECHANISM IS BASED ON
CERTAIN ASSUMPTIONS ARE ABSENT. LIKE NO EXTERNAL INTERFERENCE, FREE
ECONOMIC SYSTEM. UNDER ECONOMIC PLANNING ELEMENTS OF PRICE MECHANISM SUCH
AS COST,PRICES AND PROFITS ARE NOT CONSIDERED
- 2. ABSENCE OF ECONOMIC CALCULATIONS :
- 3. ABSENCE OF PRIVATE OWNERSHIP
- 4. ABSENCE OF FREE COMPETITION
- UNDER PLANNED ECONOMY DEMAND AND SUPPLY ARE NOT INDEPENDENT BUT
CONTROLLED
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PRICE MECHANISM OPERATIVE UNDER ECONOMIC PLANNING
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LERNER,TAYLOR AND LANGE : POSSIBLE
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POSSIBILITY OF PROPER ALLOCATION OF RESOURCES : POSSIBILITY OF RATIONAL ALLOCATION OF
RESOURCES AND USE OF ACCOUNTING PRICES THAT EVEN IN CASE OF ECONOMIC PLANNING
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TRIAL AND ERROR METHOD : MAY BE USED FOR THE PURPOSE OF DETERMINANTION
AND ALLOCATION OF RESOURCES
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TRIAL AND ERROR METHOD REFERS TO THAT METHOD WITH WHO’S HELP THE VALUE OF
EACH FACTOR OF PRODUCTION IS DETERMINED BY PLANNING AUTHORITY. DEMAND FOR
FACTOR IS LESS THAN SUPPLY HIGH PRICE WILL BE FIXED
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TRIAL AND ERROR METHOD : MAY BE USED FOR THE PURPOSE OF DETERMINANTION AND
ALLOCATION OF RESOURCES
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TRIAL AND ERROR METHOD REFERS TO THAT METHOD WITH WHO’S HELP THE VALUE OF
EACH FACTOR OF PRODUCTION IS DETERMINED BY PLANNING AUTHORITY. DEMAND FOR
FACTOR IS LESS THAN SUPPLY HIGH PRICE WILL BE FIXED
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WILL FIND THE ACCOUNTING PRICE BY MAKING A FRESH EVALAUATION OF THE FACTOR
CONCEREND.
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PRICE MECHANISM OPERATIVE UNDER ECONOMIC PLANNING
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OSCAR LANGE’S VIEWPOINT : REAL FREE
MARKET ECONOMY IS NOT PERFECTLY COMPETITIVE RATHER IT IS OLIGOPOLY OR
MONOPOLISTIC COMPETITION
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ACCORDING TO LANGE THE RELAITY IS THAT BECAUSE OF THE SUPERIORITY OF PLANNED
ECONOMY. THER IS FAR LESS NEED OF THE TRIALS TO FIND OUT THE CORRECT
EQUILIBRIUM PRICE UNDER FREE MARKET ECONOMY
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PRICE MECHANISM OPERATIVE UNDER
ECONOMIC PLANNING
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OSCAR LANGE’S VIEWPOINT :
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THREE CONDITIONS OF EQUILIBRIUM :
- EACH PRODUCER AND CONSUMER SHOULD SO ADJUST HIS SALE AND PURCHASE THAT
PRODUCER COULD NOT INCREASE HIS INCOME AND CONSUMER HIS SATISFACTION.
SUBJECTIVE CONDITON OF EQUILIBRIUM.
2.
PRICE OF EACH COMMODITY SHOULD BE DETERMINED IN SUCH A WAY AS TO EQUATE ITS
DEMAND AND SUPPLY. IT WILL BE TREATED AS ABSOLUTE CONDITION OF EQUILIBRIUM.
3.
INCOME OF THE CONSUMERS MUST BE EQUAL TO THE INCOME AND PROFIT OBTAINED FROM
THE SALE OF THEIR PRODUCTIVE SERVICES.
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OSCAR LANGE’S
VIEWPOINT :
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ALL THREE CONDITIONS ARE FULFILLED BY PARAMETRIC FUNCTION OF PRICE
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MEANS EACH PERSON TRIES TO ADJUST HIMSELF WITH MARKET PRICE BY TRIAL AND
ERROR METHOD. THIS PROCESS CONTINUE TO EQULIBRIUM IS ESTABLISHED OR ABSOLUTE
CONDITION IS FULFILLED
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PRICE MECHANISM OPERATIVE UNDER
ECONOMIC PLANNING
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PLANNING AUTHORITY SHOULD FRAME TWO
RULES :
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THE MANAGERS OF THE FACTORIES FOR FULLFILMENT OF ABSOLUTE AND SUBJECTIVE
CONDITIONS
1.
AT THE GIVEN VOLUME OF PRODUCTION COST OF PRODUCTION SHOULD BE MINIMUM
2.
SCALE OF PRODUCTION SHOULD BE SELECTED AS TO MAKE MARGINAL COST OF
PRODUCTION TO PRICE
PREVAILING PRICES ARE TREATED AS CORRECT PRICES
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ALTERNATIVE FORMS OF ECONOMIC PLANNING
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DICKENSON, TAYLOR AND PIGOU SUGGESTED SOME FORM OF ECONOMIC PLANNING
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PLANNING BY INDUCEMENT/DEMOCRATIC PLANNING
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DEMOCRATIC PLANNING: FORMULATION LEVEL PLANNING COMMISSION PREPARES
A DRAFT AND FINALLY APPROVED BY THE NATIONAL DEMOCRATIC COUNCIL. AT THE
EXECUTION LEVEL ALL PROGRAMMES ARE SUBJECTED TO APPROVAL BY THE VILLAGE
PANCHAYAT, PANCHAYAT SAMITI AND DISTRICT COUNCIL
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PLANNING BY INDUCEMENT: PEOPLE’S COOPERATION IS
SOUGHT.
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FORMS OF
PRICE MECHANISM IN ECONOMIC PLANNING
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COMPETITIVE PRICE SYSTEM: BASED ON MARGINAL PRICE. THIS SYSTEM IS CALLED
COMPETITIVE PRICING SYSTEM. IMITATION OF MARKET PRICE MECHANISM.
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PLANNING AUTHORITY TAKES INTO CONSIDERATION PEOPLE’S WILLINGNESS AND
POWER TO WORK, SELECTION OF OCCUPATION, LEISURE AND WANTS RELATING TO
CONSUMPTION
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COMPETITIVE PRICE SYSTEM: UNDER ECONOMIC PLANNING COMPETITIVE PRICES ARE
DETERMINED BY PLANNING AUTHORITY WHILE UNDER FREE MARKET ECONOMY COMPETITIVE
PRICES ARE DETERMINED BY THE FORCES OF DEMAND AND SUPPLY.
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AUTHORITATIVE PRICING SYSTEM : WHEN PLANNING AUTHORITY FIXES THE PRICES ON
THE BASIS OF PUBLIC SCALE OF PREFERENCE IN PLACE OF INDIVIDUAL PREFERENCES
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IN UNDER DEVELOPED COUNTRIES SHADOW PRICES ARE FIXED BY ECONOMIC PLANNING.
THOSE PRICES WHICH REPRESENT THE INTRINSIC OR TRUE VALUE OF PRODUCTS AND
FACTORS
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SAME CAN BE ALSO REFERRED AS THE VALUE OF MARGINAL PRODUCT OF THE FACTOR
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SUPERIORITY OF PLANNED PRICE MECHANISM
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SUPERIORITY OF PLANNED PRICE MECHANISM
1.
COMPARATIVE STABILITY IN PRICES
2.
FLEXIBLE
3.
PROPER UTILIZATION OF RESOURCES
4.
TO STIMULATE UTILIZATION OF NEW TECHNIQUES OF PRODUCTION
5.
BETTER DISTRIBUTION SYSTEM
6.
CONTROL OVER UNNECESSARY CONSUMPTION
7.
MORE USEFUL DURING WAR
8.
STIMULATES ECONOMIC DEVELOPMENT OF UNDER DEVELOP COUNTRIES
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