PRICE MECHANISM

Definition: Price mechanism refers to the system where the forces of demand and supply determine
the prices of commodities and the changes therein. It is the buyers and sellers who actually determine
the price of a commodity.

Definition: Price mechanism is the outcome of the free play of market forces of demand and supply.
However, sometimes the government controls the price mechanism to make commodities affordable for
the poor people too.

MARKET STRUCTURE
CIRCULAR FLOW OF THE ECONOMY

BUSINESS CYCLE
INDIFFERENCE CURVE

LAW ON DIMINISHING RETURNS

Diminishing returns, also called law of diminishing returns or principle of diminishing
marginal productivity, economic law stating that if one input in the production of a
commodity is increased while all other inputs are held fixed, a point will eventually be
reached at which additions of the input yield progressively smaller, or diminishing, increases
in output.
In the classic example of the law, a farmer who owns a given acreage of land will find that a
certain number of labourers will yield the maximum output per worker. If he should hire more
workers, the combination of land and labour would be less efficient because the proportional
increase in the overall output would be less than the expansion of the labour force. The
output per worker would therefore fall. This rule holds in any process of production unless
the technique of production also changes.
PRODUCTION POSSIBILITY FRONTIER
A production possibility frontier (PPF) shows the maximum possible output combinations
of two goods or services an economy can achieve when all resources are fully and efficiently
employed.
PRICE ELASTICITY
Price elasticity of demand is an economic measure of the change in the quantity demanded
or purchased of a product in relation to its price change. Expressed mathematically, it is:

Price Elasticity of Demand = % Change in Quantity Demanded / % Change in Price

Price elasticity is used by economists to understand how supply or demand changes given
changes in price to understand the workings of the real economy.
AGGREGATE DEMAND AND SUPPLY