Abstract
Economic mechanisms refer to human activities based on rational cost principles that are guided by specific objectives and organized in target-oriented forms of interaction. They involve both parties in the exchange of either goods or services and form the basic foundation of a market system. An essential component of economic mechanisms is the pricing system which allows for fluctuation in the value of goods and services based on the changes in their supply and demand. Although it is a complex concept, it is instrumental for the efficient functioning of the modern economy.
Introduction
Economic mechanisms refer to the processes by which economic factors such as prices, wages, and profits are determined by rational behaviour in competitive markets. It considers the effects of economic decisions such as production, consumption, and investments in the growth or decline of an economy. Economics is a field that deals with understanding economic behaviour and maximizing economic efficiency. Economic mechanisms attempt to explain how markets and economies work by analysing consumer decisions and studying the impact of financial policies.
The concept of economic mechanisms has been developed over the centuries, with rational economic behaviour being observed generally in the late 17th century. Economic processes are based on the principle that resources are scarce and demand for them is unlimited; as a result, the value of goods and services fluctuates depending on the availability of these resources. The pricing system established by economic mechanisms helps to ensure that resources are used in an efficient and productive manner.
Theory Behind Economic Mechanisms
The economic mechanism has its roots in the theories of Adam Smith and later expanded by Karl Marx and other economists. Smiths theory of the invisible hand states that free markets, guided by an invisible hand, lead to an efficient distribution of resources. This means that in the absence of government intervention and distortion, laborers, consumers, and entrepreneurs make rational decisions in pursuit of their self-interest, leading to an equitable distribution of resources and a decrease in the costs of production.
Marx developed this theory further, examining the different classes that characterize the capitalist system and how their interaction determines the values of goods and services. His analysis of capitalist economies led to the conclusion that when considering economic mechanisms, the class structure of society should be taken into account.
Elements of Economic Mechanisms
There are three essential elements of economic mechanisms: markets, prices, and exchange. These components work together to establish a well-functioning economy.
Markets are the structures in which buyers and sellers come into contact with each other. The structure of a market depends on the type of goods and services being exchanged, as well as the participants in the exchange. Prices are determined by the forces of supply and demand, and they represent the relative scarcity of the goods or services being offered.
Exchange is the final element of economic mechanisms. This is the process by which goods and services are exchanged between buyers and sellers. Exchange usually occurs through the use of money, although other forms of payment such as bartering and in-kind services can also be used.
Conclusion
Economic mechanisms form the basis for modern economic systems. A well-functioning economy depends on efficient markets and rational decision-making, both of which are determined by the inherent elements of the economic mechanism. Prices are determined by the forces of supply and demand, and exchange is conducted through the use of money. Economic mechanisms, therefore, play a crucial role in the modern economy and are a fundamental part of any comprehensive economic analysis.
