Price mechanism is an economic term that refers to the manner in which the prices of commodities affect the demand and supply of goods and services. Price mechanism affects both buyers and sellers who negotiate prices of goods or services. A price mechanism or market-based mechanism refers to a wide variety of ways to match up buyers and sellers through price rationing.
An example of a price mechanism uses announced bid and ask prices. Generally speaking, when two parties wish to engage in a trade, the purchaser will announce a price he is willing to pay (the bid price) and seller will announce a price he is willing to accept (the ask price).
The primary advantage of such a method is that conditions are laid out in advance and transactions can proceed with no further permission or authorization from any participant. When any bid and ask pair are compatible, a transaction occurs, in most cases automatically.
Read more about Price Mechanism: Effects of The Price Mechanism, Stock Market, Auctions, Other Applications
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