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Procedure for Price Determination

Price determination is the process of determining the price of a commodity in the market. In case of a Perfect Competition Market, price is determined by market forces using the method of Price Mechanism. That is, the Equilibrium price is the one where the demand equals the supply. The market reaches this condition naturally. This mechanism can be better illustrated with the help of a graph where equilibrium price is reached where the demand curve intersects the supply curve. In a Perfect Competition market, no seller can freely or individually determine their prices, hence they are known as the ‘price takers’.

On the other hand, if it is a Monopoly Market, the price mechanism would not work since the monopolist is the only seller of that certain product in the market. No matter what price he charges, consumers will be compelled to make purchases at that price since there are no alternative options. That is the reason monopolists are also referred to as ‘Price makers’.

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