This document discusses pricing mechanisms and concepts from an economics perspective. It defines pricing as the process of determining the cost for goods and services based on factors like production costs, competition and demand. It then describes price mechanisms as how buyers and sellers negotiate prices based on supply and demand through mutual exchanges. Finally, it outlines three key functions of price mechanisms: 1) they act as signals to producers about supply and demand, 2) they transmit consumer preferences to producers, and 3) they provide incentives for producers and consumers to change their behavior in response to price changes.

1. THE UGANDA INSTITUTE
OF BANKING &
FINANCIAL SERVICES
UIBFS
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Introduction to Basic Economic Theory and Concepts
The Banking Economic Systems
Pricing and Price Mechanism
Inflation
The Government and Economy
Types of Business Organizations
MODULE COVERAGE
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International Trade and Regional Groupings

2. THE UGANDA INSTITUTE
OF BANKING &
FINANCIAL SERVICES
UIBFS
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Pricing and Pricing Mechanism
• Pricing is the process of determining what a
company will receive in exchange for its
products. Pricing factors are manufacturing cost,
market place, competition, market condition,
and quality of product. Pricing is also a key
variable in microeconomic price allocation
theory.
• Pricing is a fundamental aspect of financial
modelling and is one of the Ps of the marketing
mix. Price is the only revenue generating
element amongst the Ps, the rest being cost
centers.
• The needs of the consumer can be converted
into demand only if the consumer has the
willingness and capacity to buy the product. Thus
pricing is very important in marketing.
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3. THE UGANDA INSTITUTE
OF BANKING &
FINANCIAL SERVICES
UIBFS
ISO 9001:2008 CERTIFIED
• Price mechanism is an economic term that refers to the buyers and sellers
who negotiate prices of goods or services depending on demand and
supply.
• A price mechanism or market-based mechanism refers to a wide variety of
ways to match up buyers and sellers through price rationing. It is the
system of economic organization in which each individual in his capacity as
a consumer, producer and resource owner is engaged in economic activity
with a large measure of liberty. They have the freedom to enter into
agreements, to lend and borrow at an agreed price.
• People are at liberty to choose any occupation to buy and sell
merchandise from anyone to anyone based on joint profits. Thus price
system is a system of mutual exchanges and coordination which guides
and organizes economic activity efficiently and leads to an efficient
allocation of resources.
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4. THE UGANDA INSTITUTE
OF BANKING &
FINANCIAL SERVICES
UIBFS
ISO 9001:2008 CERTIFIED
Effects of Price Mechanisms
Price Mechanism describes the means by which the many millions of decisions taken
each day by consumers and businesses interact to determine the allocation of
scarce resources between competing uses. This is the essence of economics!
Price mechanism plays three important functions in any market-based economic
system:
1. The signalling function
Firstly, prices perform a signalling function. This means that market prices will adjust
to demonstrate where resources are required, and where they are not. Prices rise
and fall to reflect scarcities and surpluses. So, for example, if market prices are
rising because of high and rising demand from consumers, this is a signal to
suppliers to expand their production to meet the higher demand.
2. The transmission of preferences
Through the signalling function, consumers are able through their expression of
preferences to send important information to producers about the changing
nature of their needs and wants. When demand is strong, higher market prices act
as an incentive to raise output (production) because the supplier stands to make a
higher profit. When demand is weak, then the market supply contracts. We are
assuming here that producers do actually respond to these price signals.
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5. THE UGANDA INSTITUTE
OF BANKING &
FINANCIAL SERVICES
UIBFS
ISO 9001:2008 CERTIFIED
3. The incentive function of the
price mechanism
An incentive is something that
motivates a producer or
consumer to follow a course of
action or to change behaviour.
Higher prices provide an incentive
to producers to supply more, or
to enter the market, because they
provide the possibility or more
revenue and increased profits.
For example, a rise in the wage
rate, which is the price of labour,
provides an incentive for the
unemployed to join the labor
market.
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