prices theory of production what are the factors of production? theory deals with the factors of...
TRANSCRIPT
Prices
Theory of Production
• What are the Factors of Production?• Theory deals with the Factors of Production and the
output of goods and services.• Law of Variable proportions: in the short run, output
will change as one input(Factors or Production) is varied, while the others are held constant– EX: you know that a little bit of salt will make the food
taste better. A bit more may make it tastier still, but too much can ruin the taste. As the amount fo the input(salt) varies, so does the output(quality of the meal).
The Production Functions• Illustrated with a schedule and graph: Only workers
was changed, no other input. 3stages of production– Increasing returns– Diminishing returns– Negative returnsFigure 5.5a
Figure 5.5b
Measures of Cost• Fixed Cost: Give some examples • Variable Cost: Give some examples• Fixed cost + Variable cost = Total Cost• Marginal Cost: Extra cost when producing more
then 1 itemFigure 5.6
S
Qo
$5
$4
$3
$2
$1
10 20 30 40 50 60 70 80
$54321
60503520 5
P QS
Price of Corn
Quantity of Corn
CORN
Combiningwith
Demand
Balancing a Market
• What is Equilibrium?
• Chart and graph
Figure 6.1a
Figure 6.1b
MARKET DEMAND & SUPPLY
7
S
Qo
$5
4
$3
2
1
2 4 6 8 10 12 14 16
PQD
$5$4$3$2$1
2,0004,0007,000
11,00016,000
$5$4$3$2$1
12,00010,0007,0004,0001,000
D
P QS
Price of Corn
Quantity of Corn
CORN
MARKET
CORN
MARKET
Market Clearing Equilibrium
Balancing a Market• What is Disequilibrium?
-Excess Demand(Shortage) -Excess Supply (Surplus)Figure 6.2aFigure 6.2b
Government Intervention
• Price Ceiling– Rent control
• Price Floors– Minimum
wage
Figure 6.5a
Figure 6.5b
Equilibrium Changes
• Figure 6.4
[D – “TIMER”; QD – price change of product (inverse)]
___1. Which of the following will cause an "Increase in Demand" for computers? a. decrease in price of computers b. decrease in income c. increase in income d. increase in price of computers
___2. Which of the following will cause an "Increase in QD" for computers? a. decrease in price of computers b. decrease in income c. increase in income d. increase in price of computers
___3. Which of the following will cause a "Decrease in Demand" for plasma TVs? a. increase in price of plasma TVs b. decrease in price of plasma TVs c. decrease in # of consum ers(marketsize)
___4. Which of the following will cause a "Decrease in QD" for plasma TVs? a. increase in price of plasma TVs b. decrease in price of plasma TVs c. decrease in # of consumers (market size)
[S – “RATNEST”; QS – price change of product (direct)] ___5. Which of the following will cause an "Increase in Supply" for DVDs?
a. decrease in price of DVDs c. decrease in resource cost b. increase in price of DVDs d. expectations of price increase
___6. Which of the following will cause an "Increase in QS" for DVDs? a. decrease in price of DVDs c. decrease in resource price
b. increase in pric e of DVDs d. expectations of price increase
___7. Which of the following will cause a "Decrease in Supply" for DVDs? a. increase in price of DVDs c. subsidies to suppliers of DVDs
b. decrease in price of DVDs d. expectations of price increase
___8. Which of the following will cause a "Decrease in QS" for digital cameras? a. increase in price of cameras c. subsidies to suppliers of cameras b. decrease in price of cameras d. expectations of digital camera price increase
C
A
C
A
C
B
D
B
c. decrease in # of consumers
Making Predictions• Suppose that your state wanted to make health care more affordable for
everyone. To do this, state legislators put a series of price controls–price ceilings–in place that cut the cost of medical services in half. What would happen to the demand for medical services at the new, lower price? What would happen to the supply of medical services that doctors would be willing to provide at the new, lower price? Where do you think new doctors would prefer to set up practice? Explain the reasons for your answers.
• Because demand for medical services tends to be inelastic, the quantity demanded will increase only moderately. Because prices for services would be set below market level, there would be less incentive for doctors to offer services. Quantity supplied would probably decrease. New doctors might want to set up practice in states where there were no price ceilings.
D0 Prices Work in a Free Market?Advantages of Prices
FreeFlexibleWide choice of Goods
Competition
Efficient Resource AllocationWhich one is better at this? Free or
Command Markets. Which one works better?
America during the Depression
Russia under Communism
• Chapter Worksheet: Supply and Demand