Price Mechanism In A Free OR Capital Economy


The price mechanism works through supply and demand of goods and services in competitive markets. In turn, prices are determined. Prices determine the production of innumerable goods and services. They organise production and help in the distribution of goods and services, ration out the supply of goods and provide for economic growth. It works as undero.

1. What and How Much to Produce. 

The main function of prices is to resolve the problems of what to produce and in what quantities. This involves allocation of scarce resources in relation to the composition of total output in the economy. As resources are scarce, the society has to decide about the goods to be produced: wheat, cloth, roads, television, power, buildings, and so on. Once the nature of goods to be produced is decided, then their quantities are to be decided. How many kilos of wheat, how many million metres of cloth, how many kilometres of roads, how many televisions, how many million kw of power, etc. Thus, the problem of the nature of goods and their quantities has to be decided on the basis of priorities or preferences of the society. If society gives priority to the production of more consumer goods now, it will have less in the future. A higher priority on capital goods implies less consumer goods now and more in the future.

This fact can be explained with the help of the production possibility curve. Let us suppose the economy produces capital goods and consumer goods. In deciding the total output of the economy, the society has to choose that combination of capital and consumer goods which is in keeping with its resources. It cannot choose the combination R which is inside the production possibility curve PP1 because it reflects economic inefficiency of the system in the form of unemployment of resources. Nor can it choose the combination K which is outside the current production possibilities of the society ; the society lacks the resources to produce this combination of capital and consumer goods, therefore, to choose among the combinations B, provides a guest level of satisfaction. If the society decides to have more capital goods, it Will choose combination B; and if it wants more consumer goods, it will choose combination D

Thus, selection depends on the following factors

(i) Consumers have to pick and choose from the vast variety of goods offered to them. The urgency of desire for certain goods means that the consumers are prepared to pay a large sum of money and higher prices. It implies larger profits for producers producing these commodities. If consumers desire goods less urgently, it means their reluctances to spend more on them and they offer lower prices. Expecting a decline in profits, producers also bring smaller quantities of their products in the market.

(ii) When producers increase the supply of commodity without any regard to the wishes

of the consumers, it will have a low value in their estimation and the lower will be its price. A small supply, on the other hand, increases the prestige of the commodity in the minds of consumers and they pay a higher price for it. Thus, the different prices which consumers pay for various commodities and services reflect their comparative values to them.

(iii) Prices also change with consumer’s tastes and preferences. Consumers register their preferences towards commodities by paying more for them and their distaste by offering less. If consumers show preference for auto-rickshaws and taxis in place of cycle- rickshaws and tongas, they offer lower prices for the latter. Some of the persons engaged in the latter trades will suck other occupations or may even start driving auto-rickshaws and taxis. Therefore, consumers’ tastes and preferences are also reflected in the prices of goods and services.

(iv) A change in the price of a commodity acts as a beacon light and a warning signal to the producer and the consumer. If the price of a commodity rises, it warns the consumers to buy less of it and at the same time it encourages the producer to produce more of it. High prices and prospects of larger profits attract new producers into the industry in the long run. Resource owners also shift their resources to this high priced industry Thus when all firms in the industry produce more, supply increases more than the demand and the price may tend to fall. On the contrary, the withdrawal of resources from the low-priced commodity brings a fall in its output. But the shifting of consumer- demand towards it, tends to raise its price in the long-run. This tendency continues till both the commodities are equally priced and offer the same profits to producers in the two industries.

(v) If the price of a commodity falls, it is a warning to the producers and consumers. Low price and low profits will induce producers to shift resources away from this industry to the high-priced industry. This long-run tendency will reduce supply and the demand will increase. As a result, prices tend to rise. On the other hand, supply increases in the high-priced industry as a result of shifting of resources into it. Demand being less, price tends to fall.

(vi) As the consumer is the sovereign, he sets the price and producers manufacture those commodities which he wants more. The more the producers produce, the larger the profits they carn and so do the resource owners. The fate of the producer is sealed if the consumer has no liking for his product and sets a low price. The producer, thus, reacts when the consumer acts and resource allocation takes place along with the production of goods.

2. How to Produce. 

The next task of prices is to determine the techniques to be used for the production of articles. Prices of factor services are the rewards received by them. Wage is the price for the service of labour, rent is the price for the service of land, interest for the service of capital and profit for the service of entrepreneurs. Thus wages, rent, interest and profit are the prices paid by the cntrepre Europe for the services of the factors of production which make up the costs of production.

Every producer aims at using the most efficient productive process. An economically efficient production process is one which produces goods with the minimum of costs. Thus, the choice of a production process will depend upon the relative prices of the factor services and the quantity of goods to be produced.

A producer uses expensive factor services in smaller quantities relative to cheap resources. In order to reduce costs of production he substitutes cheaper resources for the dearer. If capital is relatively cheaper than labour, the producer will use capital-intensive production techniques. If labour is relatively cheaper than capital, labour-intensive production processes will be used. In less developed countries where labour is cheap, techniques involving more labour contribute to least costs; while in developing economies where labour is relatively expensive, a capital using and labour-saving techniques combine efficiency with minimum costs. Since one price for a single commodity prevails in a free enterprise economy, only economically efficient

producers can continue in the industry. Those who are incapable of paying their minimum rewards (prices) will either close down or shift to the manufacture of some other commodity.

3. To Determine Income Distribution. 

Another function of prices is to determine the distribution of income. In a free enterprise economy product-distribution and income-distribution are interdependent. It is a system of mutual exchanges where the producers and consumers are largely the same people. The owners of factories call their services for moncy and then spend that money to buy the goods produced by Tractor services. Producers sell goods and services to consumers for money and consumers receive income as owners of factor services. Thus income flows from owners of resources (consumers) to producers and back to consumers again.

Prices play an important role in this income flow. When the consumers buy commodities it is their cost of living. When producers sell commodities, it is their business receipts. What consumers receive as owners of factor-services, it is their personal income and when producers pay for factor-services, it is the cost of production. It means that the income of an individual depends upon the amount of resources owned by him and the evaluation of his resources in the minds of consumers. People owning large quantities of resources have high incomes and/or

They contribute more to the making of commodities which satisfy the consumers much. People owning small quantities of resources have low incomes and/or they contribute little to the making of commodities which add to consumer satisfaction. Such income differentials are, however, self-correcting. No individual can afford to receive a low income for long. So workers in the low-income category will seck employment in that industry which pays higher wages. The movement of workers from the lower-paying industry to the higher-paying industry results in the reduction of supply of the former industry and increase in the supply of the latter industry. Reduction in supply raises the price of the product, increases the profits of the producer and the incomes of the workers. On the contrary, increase in the supply of the other commodity lowers

its price reduces profits as well as the incomes of the workers. This process will continue till income differentials disappear altogether. In this way, prices not only determine income distribution but also brings its equality

4. To Utilise Resources Fully. 

The price mechanism also helps in the full utilisation of the resources of an economy. Full utilisation of resources implies their full employment. This requires an increase in income through large investments, and ultimately to the equality of saving and investment. In a growing economy equality between saving and investment is brought about by reductions in interest rates. When the economy is nearing the level of full employment by an efficient use of resources, income grows at a rapid rate, and so do savings. But investment lags behind which can be raised to the level of savings by interest-free reductions. Thus the rate of interest acts as an equilibrating mechanism. Therefore, monetary and fiscal measures and physical controls are also required to influence the decisions of consumers and producers regarding saving and investment.

5. To Provide an Incentive to Growth. 

Lastly, prices are an important factor in providing for economic growth. The impetus for improvement, innovation and development comes through the price mechanism. Higher prices and profits encourage large industrial concerns to spend huge sums on research and experimentation to improve and develop better techniques. 

The adaptation of the economic system to change in wants, resources and technologies takes place through prices. if consumers want more of one commodity in preference to the other the price of the former rises. Resources move to that industry. Profits also increase.

Larger profits lead to the adoption of superior technology which lowers costs. Larger pots and low costs attract new producers who provide new capital. All this leads to capital formation. No doubt economic growth depends upon a number of other factors, yet prices play an important role in providing for economic growth with stability. This is explained in figure 4. In this diagram, the economy is stagnant at points inside the production possibility curve PP. For its economic growth, it has to be moved on to point A of the production possibility curve PP whereby the economy produces larger quantities of consumer and capital goods. This is possible through a higher rate of capital formation which consists of replacing existing capital goods with new and more productive ones by adopting morc efficient production techniques or through innovations. More growth leads to the outward shifting of the production possibility curve from PP to PP1. Point C represents this situation where large quantities of both consumer and capital goods are produced in the economy. In this way, economic growth enables the economy to have more of both the goods through higher prices, profits and incomes. Thus the price mechanism, working through supply and demand in a free enterprise economy acts as the principal organising force. It determines what to produce and how much to produce. It determines the rewards of the factor services. It brings about an equitable distribution of income by causing resources to be allocated in the right directions. It works to ration out the existing supplies of goods services, utilises the economy’s resources fully and provides the means for economic growth.


The price mechanism does not operate freely. It acts under certain restraints placed by the government in a free enterprise economy. Moreover, there are the “imperfections of competition which hinders the working of the price mechanism.

Let us identify these factors as below:

1. The government issues directives to producers to manufacture goods of different types and in fixed quantities which are required to meet the social wants.

2. Even the resource owners are not allowed to act freely. If the government wants the private sector to produce more for the future, then resources will be reallocated towards or the capital goods sector. People may also be asked to save more and consume less in the present.

3. The imposition of administrative controls, regulating the supplies of goods, rationing

of commodities, issuing of licences, fixation of quotas, etc. are some of the methods which tend to modify the working of an automatic price system.

4. When the government fixes prices of goods and services of say sugar, cloth, steel, etc., and wages of workers, these act as constraints on the working of the free market mechanism.

5. Such measures as progressive income and wealth taxes, provision for social security, price support programme, giving of subsidies, credit facilities, etc., also interfere with the working of the price system.

6. Measures aimed at nationalisation of social services also tend to modify the price

system in favour of a fixed economy.

7. The price mechanism functions under the assumptions of perfect competition. But in the real world, competition is nowhere perfect.

8. The imperfections of competition also lead to the emergence of monopolies which result in wrong pricing, incorrect and wasteful resource allocation and monopoly profits.

9. The price mechanism has increased income inequalities instead of reducing them This is because supply and demand do not work properly. Production is guided by the demand of the flute and not by the needs of the poor. Resources are, therefore, directed towards producing luxury goods for the rich. This further leads to mal-distribution of income.

Financial Quiz Questions With Answers

1. Which of the following makes a financial institution a bank?

2. Creation of money by commercial banks refers to

3. How much money are banks able to create is determined by

4. The Value of Money Multiplier equal

5. When the central bank sells securities in the market, the credit creation capacity of the commercial banks is likely to

6. Lowering of CRR by the central bank has the following impact on the credit creation capacity of the commercial banks

7. Raising Reverse Repo Rate by the central bank is likely to have the following impact on demand for goods and services in the economy

8.With lowering margin requirements by the Central bank, the borrowing capacity of the borrowers

9. What items are not included in the Money supply measure?

10. High powered Money consists of

11. Money Supply refers to

12. Money Supply is a______concept

13. Which one of these is a limitation of the barter exchange?

14. Who regulates the money supply in India?

15. Which of the following is not a problem with the barter system of exchange?

16. Money supply includes

17. Supply of money refers to the quantity of money

18. ______is the main source of money supply in an economy

19. This bank operates in the public interest without any profit motive

20. Through the process of______commercial banks are able to create credit, which is in far excess of the initial deposits

21. What will be the effect of an increase in the ‘Repo Rate on the Money Supply?

22. Banks create credit

23. Which of the following will increase the money supply?

24. In order to reduce credit in the country, RBI may

25. The one rupee note and coins are issued by

26. Which of these is not the function of the central bank?

27. Other name of legal reserve requirement is

28. Which of the following is not the function of the central Bank

29. Which bank controls the banking and monetary structure of India?

30. Which institution performs the activity of credit creation

Indian Polity & Constitution MCQs

1. What is the minimum age prescribed by the Constitution of India for a candidate to be elected as Vice president of India?

2. Which among the following articles of the Constitution of India abolishes untouchability?

3. New All India services can be initiated in India only if the following makes a recommendation?

4. How many states are part of the North eastern Council ?

5. In which year the legislative council of Tamilnadu was abolished?

6. Who among the following presidents of India was the first Chief Minister of Modern states in India?

7. Who called the Governor of a state as “federal fireman”?

8. In which year, Daman & Diu were separated from Goa?

9. Freedom of Press is implicit under which article of the Constitution of India?

10. In which case, the Supreme Court held that the Preamble is an integral part of the constitution?

11. How many times does the word “Secular” appear in our constitution?

12. The Upper House of Egypt parliament is known as

13. Which of the following is not a correct feature of the parliamentary system of government in India?

14. In which year was the first linguistic State formed?

15. Under which Article the Parliament can prescribe residence within a state or union territory?

16. Which of the following articles of Part III belongs to a different category?

17. In which country does the institution of ‘Shadow Cabinet’ exist?

18. According to which Constitutional Amendment defectors have no more protection on grounds of splits?

19. When was the Parliamentary Forum on Millennium Development Goals created?

20. What is the maximum age until which a Supreme Court judge can hold office?

Indian Polity & Constitution MCQs SET:- 02

1. Who administers the oath of office to the President?

2. Where can be the impeachment charges initiated against the President of India?

3. In how much time the vacant post of President should be filled?

4. To whom does the Vice-President submit his resignation?

5. Who described the Prime Minister as “the steering wheel of the ship of the state”?

6. Which act of Parliament abolished the Jammu and Kashmir Legislative Council?

7. Who has the final power to decide whether a particular bill is a money bill or not?

8. Which of the following can only discuss the budget but cannot vote on the demands for grants?

9. Which of the following Union Territories has a High Court of its own?

10. The Advertising Standards Council of India (ASCI) was established in which year?

11. When was the Customs Excise and Service Tax Appellate Tribunal (CESTAT) constituted?

12. How many ex-officio members are there in the National Human Rights Commission?

13. Where is the headquarters of the National Human Rights Commission?

14. Who can be the chair of the Finance Commission in India?

15. What is the main basis for allocation of seats to various States in the Lok Sabha?

16. Which article contains provisions regarding removal and suspension of a member of a Public Service Commission?

17. In which year was  the Telecom Regulatory Authority of India established?

18. Where is the headquarters of the National Human Rights Commission?

19. Which part of the Constitution makes provisions with regard to the electoral system in India?

20. In which year elections to the parliament were de-linked from elections to the state assemblies?

Constitution MCQs SET:- 03

1. Which article of the Indian Constitution provides for Vice-President of India?

2. Which among the following constitutional amendment acts, reduced the age of voting from 21 years to 18 years?

3. What is the maximum gap / interval between two sessions of parliament?

4. Which among the following articles defines the Money Bill?

5. Which among the following schedules is related to the responsibilities of Municipalities?

6. Which of the following are the conditions for acquiring Indian Citizenship?

7. Which Constitutional Amendment gave Right to Education to children in India?

8. Which among the following acts was known as the Anarchical and Revolutionary Crime act 1919?

9. Which of the following statements is an incorrect statement about the Finance Commission?

10. Which part of the Indian Constitution deals with the Panchayats?

12. Which of the following depicts the correct sequence in the context of Preamble of the Constitution of India?

13. India had transferred Berubari territory to which of the following countries?

14. Which of the following writs guarantee personal freedom?

15. What are Dilatory motions in context with the procedure in parliament?

16. Which act of British India was one of the main sources of the Constitution of India?

17. Who is called ‘Modern Manu’?

18. Currently how many Union Territories are there in India?

19. How many Fundamental Rights did the Indian Constitution contain initially ?

20. Who is the leader of the Parliament?


Q1. The Universal/World Children’s Day is celebrated on __________.

Q2. Who has been selected for the prestigious Lifetime Achievement Award for 2021 by the Badminton World Federation (BWF) Council?

Q3. Prime Minister Narendra Modi has handed over the indigenously built light combat helicopters (LCH), developed by __________.

Q4. Which two will be facilitated with the Indian Film Personality of the Year award at IFFI 2021

Q5. SIDBI has entered into a partnership with which of the following to help MSMEs?

Q6. Who has authored her first Novel ‘Lal Salaam: A Novel’?

Q7. What is the theme of Universal/World Children’s Day 2021?

Q8. According to the latest ‘World Bank’s Remittance Prices Worldwide Database’ report by the World Bank, which country became the world’s largest recipient of remittances by receiving USD 87 billion in 2021?

Q9. Who has written the book “Srimad Ramayanam”?

Q10. Who has received the 12th Manipur State Award for Literature 2020 for his book “Ei Amadi Adungeigi Ithat”?


1.Which among the following is popularly called Hypo?

2.“Oil of mirbane” is the most common name of which among the following?

3.Which compound of mercury is used as antiseptic?

4.Which among the following is a major component of Gobar Gas?

5.What is the common name of Calcium Sulphate Hemihydrate?

6.Which among the following was the first artificially produced element?

7.Which of the following elements have the lowest and highest boiling point in the Periodic table?

8.Consider the following comparisons of Alkali Metals and Alkaline Earth Metals

9.Nerve agents are a class of

10. Which of the following is the poorest conductor of heat in comparison to other options?


1. Which of the following is the poorest conductor of heat in comparison to other options?

2. The energy required to remove an electron from the outermost shell of an atom in its isolated gaseous state is called?

3. Which among the following is a Noble Gas?

4. Which among the following is responsible for depletion of Ozone?

5. Which among the following is an example of a Chemical Change?

6. When a tube light breaks, a cracking sound is produced because __?

7. Which among the following gas was leaked at Bhopal during the Bhopal gas tragedy on 2-3 December 1984?

8. Which of the following is not a non-metallic mineral?

9. Trimethylxanthine is a chemical name of a stimulant which is found in tea and coffee. What is the popular name?

10. Which among the following is also known as white gold?

11. Which compound of mercury is used as antiseptic?

12. Which among the following is a common salt in Detergents?

13. When Sulphur is heated with rubber, the process is commonly known as ?

14. PVC is a polymer of ?

15. Which among the following was the first artificially produced element?

16. Which among the following minerals is also known as Horn Silver?

17. Which among the following impurity in drinking water causes the “Bamboo Spine” disorder?

18.The patient is instructed to drink which of the following solutions before undergoing radiological examinations?

19. Which of the following chemicals is used as a molecular sieve to filter common salts from seawater to produce potable water?

20. What is the unit of Stress?

Children’s Day

1. When was Jawaharlal Nehru born?

2. Educated in England at Harrow and Cambridge, what occupation did Nehru qualify for?

3. Nehru became friends with Mahatma Gandhi and joined what independence group in 1918?

4. From where Jawaharlal Nehru had completed his studies for a barrister?

5. When did Jawaharlal Nehru first meet Mahatma Gandhi?

6. International Children’s Day is observed on ____ ?

7. Luxor is the city of_____?

8. Who began the Children’s Day celebration?

9. Which of these countries first declared Children’s Day as a public holiday?

10. In which place Jawaharlal Nehru organised the first Kisan March?

11. On what important issue did Nehru and Gandhi differ?

12. In which place Jawaharlal Nehru organised the first Kisan March?

13. When Jawaharlal Nehru became the General Secretary of the All India Congress Committee?

14. Which of the following legislative initiatives did Nehru not introduce?

15. In preparing India for the future, which of the following was not an area Nehru influenced?

16.  When was Jawaharlal Nehru elected as the President of the Lahore Session of the Indian National Congress?

17. What incident affected Nehru’s political standing and his health?

18. Which newspaper was started by Jawaharlal Nehru?

19. Which of the following legislative initiatives did Nehru not introduce?

20. Who swore in Nehru as India’s first Prime Minister?


1. Gandhi’s inspiration for civil disobedience came from the writings of

2. Mohandas Karamchand Gandhi was called as Mahatma by

3. During the Non-Cooperation Movement, which award did Gandhiji return?

4. When was Mahatma Gandhi arrested during the ‘Quit India Movement’ of 1942?

5. Gandhiji believed that

6. At which one of the following places did Mahatma Gandhi first start his Satyagraha in India?

7. Who is the author of Gandhiji’s favourite Bhajan ‘Vaishnava jana to tene kahiye’?

8. In Gandhian Socialism

9. October 2, the birthday of Mahatma Gandhi is internationally observed as –

10. At which of the following sessions of the Indian National Congress, did Gandhiji preside as the President?

11. Which of the following Round Table Conferences was attended by Mahatma Gandhi?

12. Who said about Gandhiji “Generations to come will scarce believe that such a one as this walked the earth in flesh and blood?

13. Who led the salt Satyagraha Movement with Gandhi?

14. In which of the following movements did Mahatma Gandhi make the first use of hunger Strike as a weapon?

15. Gandhiji organized ‘Dandi March’ in 1930 against :

16. Who led the extremists before the arrival of Gandhi on the political scene for India’s freedom struggle?

17. Which of these slogans is associated with Gandhiji?

18. Who of the following is considered the political guru of Mahatma Gandhi?

19. Which of the following newspapers was NOT published by Mahatma Gandhi?

20. Which of the following books has NOT been written by Mahatma Gandhi?

21. In which year did Mahatma Gandhi finally return to India from South Africa?

22. To how many years of imprisonment was Mahatma Gandhi sentenced for the first time in India?

23. Which of the following movements was NOT started by Gandhiji?

24. In relation to which of the following did Gandhi use the phrase “Post-dated cheque on a crashing bank”?

25. Which of the following is not correct about Mahatma Gandhi?


1. What was the age of Gandhi ji at the time of his marriage?

2. Where was Gandhi Ji born?

3. Who was the political guru of Mahatma Gandhi ji?

4. From which station in South Africa Gandhi was thrown out of the train?

5. How old was Gandhi when he reached London to become a barrister?

6. At which place was Gandhiji arrested for the first time by the British Government for sedition?

7. On which day of March 1930, the famous Dandi March launched by Gandhi ji?

8. When was the Gandhi – Irwin Pact signed?

9.  Who killed Gandhi Ji?

10. Who was given the slogan ‘Do or die’?

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