can anybody explain price system and price control in economics?

Answer 1

I'm not sure what exactly you are asking, but I'll have a go (purely theoretical).

There are 2 major forces in Economics, Supply and Demand.

Supply shows the quantity producers can put on the market at different prices. The higher the price they get, the more producers would want to put on the market.
Demand shows the quantity that people are willing and able to buy at different prices. The higher the price, the less people would want to buy.

Now if the market is left to its own devices and there is good information flow, then an equilibrium price will be reached at the price where quantity supplied equals quantity demanded.

Say we are talking about the market for ice cream, and imagine it is in equilibrium with wthat is produced getting sold at the current price. Imagine a scientist discovers that ice cream is the greatest facial product. All of a sudden there'll be hordes of people trying to buy icecream, at every price the quantity demanded rises. Therefore at the current price, more is demanded than is supplied.

This will push the prices up and reduce quantity demanded and increase quantity supplied, until a new equilibrium price is reached at the new higher price.

Price control is when there is say, government intervention in the market. It can take the form of a price floor below which the price is not allowed to fall, or a price ceiling above which the price cannot go.

Take a price floor, such as the minimum wage. Obviously for it to be effective it has to be above the 'free-market-equilibrium price', Then, at the price floor, there will me more people willing to work (higher quantity supplied), but less companies willing to hire (lower quantity demanded). Therefore, the market will be restricted by the tightest restriction which is how many people companies are willing to hire. Hence the wage goes up, but the number of people employed falls.

A price ceiling is the reverse; it is placed below the 'free-market-equilibrium'; imagine the case of rice. If there is a maximum price that can be paid for rice and this is below the 'free-market-equilibrium' then farmers will want to produce less rice; quantity supplied falls (may be they switch to rearing fish). On teh other hand, as rice becomes cheaper, more people want to buy rice, may be switching from bread; quantity demanded rises. At the price ceiling, quantity demanded exceeds quantity supplied, there is a shortage of rice. In the end, the price ceiling causes the traded quantity to be restricted by quantity supplied; less rice is traded as price falls.