The Price mechanism and Pricing Decision

Price Mechanism

🔹️Goods Market

Under price mechanism ,if there is an increase in demand of a good ,then prices will go higher until the demand for a good becomes equal to the supply of that good. The market situation when the demand and supply of a good are equal ,is known as Market equilibrium.

🔹️Factor Market

When the supply of a good increases, it leads to an increase in the demand of the factors of production. As the demand increases,the price of factors go higher until the demand and supply of factor becomes equal.

Pricing Decision

🔹️Consumer Surplus

The difference between the price a consumer is willing to pay and what the consumer actually pays.
For eg : The consumer is willing to pay Rs 700 for a product but he actually pays only Rs 500 then Rs 200 is the consumer surplus .

🔹️Producer Surplus

Difference between the price that the producer is willing to sell and the price that he actually sells.
For eg : The producer is willing to sell at minimum Rs 500 but he actually sells at Rs 600 then Rs 100 is the producer surplus.