The Price System

1. Price System

Using the tools of demand and supply model we can know look at the question on how goods are allocated in an economic system. The price system is the idea that prices serve as a way to allocate goods to households whenever quantity demanded exceeded quantity supplied. This is also referred to as price rationing. Let us take a closer look at how it works.

A.  Price Rationing

Here’s an intuitive example on how prices can be used to ration demand. Suppose that a newly discovered Vincent Van Gogh painting is being brought before an auction market. (See Figure 1) If the opening bid was at $100, there would be 1,000,000 people who would demand this one of a kind painting at that price.  Clearly, there is excess demand.  How does the market system determine which of these 1,000,000 bidders will end up with the painting? Well, bidders will start pushing the prices higher. As prices increase, the number of bidders will drop until there is only one bidder left.  At $200,000,000 there will be only 1 buyer and that is the person who will get the Picasso painting. Continue reading

An introduction to economics terms and concepts



A simple and most widely quoted definition of economics is that given by the British Economists, Lionel Charles Robbin (1898 – 1984):

Economics is the science which studies human behaviour as a relationship between ends and scare means which have alternative uses.

In the above definition, the word ‘ENDS’ refers to human wants usually classified as goods and services.  The word ‘MEANS’ refers to productive resources otherwise called factors of production.  In every society, the productive resources are combined in different ways to produce different types of goods and services.

Economics is described as a science subject based on the way economists study and explain human behaviour concerning how best to allocate scarce resources among competing uses.  The economists adopt scientific method in which theories of human behaviour and developed and tested against the facts in a way similar to the practice in the pure sciences like Chemistry and physics.  However, economics is more appropriately placed within the social sciences because its subject matter, human behaviour in the production, distribution and consumption of goods and services can neither be controlled in the laboratory nor be predicted with absolute accuracy.


A number of basic concepts or terms lie at the heart of economic science.  The most important ones are explain in this section. Continue reading