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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.

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Presentation on theme: "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."— Presentation transcript:

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2 Prices

3 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).

4 The Production Functions Illustrated with a schedule and graph: Only workers was changed, no other input. 3stages of production – Increasing returns – Diminishing returns – Negative returns Figure 5.5a Figure 5.5b

5 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 item Figure 5.6

6 S Q o $5 $4 $3 $2 $ $ PQSQS Price of Corn Quantity of Corn CORN CombiningwithDemand

7 Balancing a Market What is Equilibrium? Chart and graph Figure 6.1a Figure 6.1b

8 MARKET DEMAND & SUPPLY MARKET DEMAND & SUPPLY 7 S Q o $5 4$ PQDQD $5 $4$3 $2 $1 2,000 4,0007,000 11,000 16,000 $5 $4$3 $2 $1 12,000 10,0007,000 4,000 1,000 D P QSQS Price of Corn Quantity of Corn CORN MARKET CORN MARKET Market Clearing Equilibrium

9 Balancing a Market What is Disequilibrium? - Excess Demand(Shortage) -Excess Supply (Surplus) Figure 6.2a Figure 6.2b

10 Government Intervention Price Ceiling – Rent control Price Floors – Minimum wage Figure 6.5a Figure 6.5b

11 Equilibrium Changes Figure 6.4

12 C A C A C B D B c. decrease in # of consumers

13 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.

14 D0 Prices Work in a Free Market? Advantages of Prices Free Flexible Wide choice of Goods Competition Efficient Resource Allocation Which one is better at this? Free or Command Markets. Which one works better? America during the Depression Russia under Communism

15 Chapter Worksheet: Supply and Demand

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