In their book, Milton and Rose Friedman have described the market as a place where the availability of goods and services overrides the fact that for the products to be available, they must have gone through a series of exchanges and cooperation. This is derived from the fact that a market depends on some form of orders that are not necessarily absolute but are necessary to ensure that goods and services are available. The authors further state that for a market to function flawlessly, there has to be some form of balance between what has been described as voluntary cooperation and command control from the authorities in charge. Looking at the dominant economies today, we see this kind of balance whereby the market is free to control itself through what Adam Smith described as the invisible hand basically describing the relationship between supply and demand, with the governments influence being reduced to that of an overseer (Friedman Friedman, 1980. pp.1-5).
Prices are more often than not determined by the market through its mechanisms. Milton and Rose Friedman have therefore correctly defined the role prices play within a market to relay the necessary information, the price will also determine the means of production and finally it plays a big part in the distribution of income. The question therefore is what is the mutual relationship between the three functions.
Supply and demand is a very important element when it comes to determining the prices of goods and services within a market. When the demand is high for a particular good or service, it means that there is a low supply probably due to low production that could be caused by a number of things, and the price of the particular service or good will also be high. This information will therefore be relayed to the various people involved with the production of the good or service, therefore prompting them to ensure that they get maximum gains without exploiting the market. The opposite is also true when there is a high supply it does not necessarily mean that the demand has gone down but the information will have a negative impact on the prices (Friedman Friedman, 1980 pp 6-9).
On the second function, Friedman and Friedman note that it is true that price determines the means of production, and as stated above, the price of a commodity is controlled its supply or demand mechanisms. As the demand goes up so does the price, this therefore means that the producer is earning from his produce. This is an incentive to the producer. He will therefore ensure that the production continues as it is or he will try to improve so as to produce commodities of even better quality that will fetch even higher prices. There are various ways through which this could happen, one being that he could hire more qualified staff, thus adding the value of the staff or he could buy better machinery so as to improve on technology. All this will be determined by the sales receipts and costs, which determine his overall income. Therefore, it is right to conclude that the supply and demand of a commodity controls its means of production (Friedman Friedman, 1980, pp 10-12)
According to the authors, the third function of price is the distribution of income. This is closely linked to the second function. It is so because the income of the producer is the difference between the amount he receives from the sale of the products and the cost of producing the same. The ability of the consumer to buy the products and therefore ensure the income of the producer will therefore depend on his or her income. The ability of a consumer to buy commodities, distribution of income, within a market depends on the income of the producer i.e. them who own the means of production. The distribution of income within the market is therefore very important as it determines the demand and supply of commodities within the market. A consumer with relatively less income will not buy certain commodities that he or she feels are out of reach. Consumers will therefore go for a cheaper commodity that can meet their demands. Therefore, depending on the distribution of income within a population, the commodity might do well because it has a high demand in the market or fail to make the required impact probably because of its unavailability or due to its poor quality (Friedman Friedman, 1980, pp 12-16)
The link between the three functions is therefore the demand or supply of the commodity. It has been discussed that the supply and demand or commodities affect each function accordingly the price of a commodity is affected by its supply and demand, which subsequently affect all the other functions. The price will determine the means of production hence, supply and demand will affect the means of production. In addition, prices determine the distribution of income, meaning that the price of a commodity determines the overall income of the producer. This income will determine how well a consumer is compensated for his efforts, thus directly affecting the supply and demand of a commodity.