Price theory is also known as micro economics and is concerned with the economic behaviour of individual consumers, producers and resource owners. Prof Leftwich defines Price Theory as "it is concerned with the flow of goods and services from business firms to consumers, the composition of flow and the evaluation of pricing of the component parts of the flow. It is concerned too with the flow of productive resources (or their services) from resource owners to business firms with their evaluation and with their allocation among alternative uses."

Price theory has certain limits. It merely gives a theoretical analysis of the working capital of the individual parts of the economy. But it does not show correct picture of the working of the economy. Based on the given data, it merely gives guidelines and hence it cannot be reliable and can thrive to be incorrect. The efficient use of scarce resources and decisions regarding it are rarely done. It does not give the description of the real world.

It is the system of economic organisation 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 organises economic activity efficiently and leads to an efficient allocation of resources.

The component of vagueness is always found when invariable modifications occur in the forces of demand and supply. The procedure of adjustment is frequently agonizing and expensive and faults sneak in. The economy is habitually overwhelmed in inflationary or deflationary progression. For instance, the supply of resources surpasses the demand, in the adjustment process of supply and demand which will decrease. Therefore this Price System is considered to be above naturally costly.

The Price system should have efficiency with the available resources and are of two types that are economic and technical. When the economy is producing optimum productivity, it has to have fully utilised resources. When the system accomplishes economic efficiency, it attains technical competence such as satisfaction of customers' tastes and preferences.

Price mechanism is restrained by the government's intervention. The governments issues directives to manufacturers such as volume of production to convene the social needs. The obligation of managerial control adaptable to supplies of goods and merchandise, allotment of commodities, licensing etc. are likely to amend the operations of a price system. Due to government's intervention, even the owners of resources are not autonomic in the action of its allocation. The administration can enforce the allocation basis from one sector to capitalist sector in the future. Even individuals are asked to preserve more and expend less. Due to the price fixation by the external sources, there arise the problems of measurement of income, taxes, provision etc. The price mechanism has increased inequalities due to the inefficiency of supply and demand.

In socialist economy, the central planning power performs the functions of the market. Since all the materials are controlled by the government, the options regarding what to produce, how to produce and whom to produce are taken within the framework of a central plan. "It establishes the rules for combining factors of production and choosing the scale of productivity of a plant for determining the output of an industry, for the allocation of resources and for the parametric use of prices in accounting."

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