Once all of the considerations above (incomes, tastes, costs of production) are accounted for, buyers will buy more of a product at lower prices and less of a product at higher prices. So prices are incentives for sellers and for buyers. Sellers who expect to earn a profit for supplying laptops will do so buyers who expect to get more pleasure from the laptop than the money they give up will buy a laptop. They can afford to sell less costly items at lower prices and higher cost items only at higher prices.īuyers and sellers respond to incentives. Sellers will be influenced by their costs of production. In addition, buyers' willingness and ability to buy will be influenced by their incomes, their tastes, conditions at other auctions for other products, and their expectations about the price and availability of similar products in the future. So the number of buyers in the room and the number of sellers in the room influence the price of the products. Prices are likely to be higher if there are only a few sellers in the room and lower if there are many. Prices are likely to be higher if there are many buyers in the room and lower if there are few. Buyers look over the products and the bidding begins. Imagine an auction where buyers and sellers come together to exchange products. How does the pricing issue get resolved? Where do prices come from? The quandary is that buyers want the lowest price possible and sellers want the highest price possible. Markets are simply interactions between buyers and sellers where the mutual goal is to make a trade. So people have been exchanging since time began. Because one person's trash is another person's treasure, two people can exchange and both will benefit. Understanding the factors that determine prices will not only make us better decision makers as consumers, but will also make us better employees by understanding what impacts the prices our employer can set. In addition, a business needs to set prices that pay all its costs and allow it to make a profit if it is to survive. To the contrary, consumers "control" prices and vote with their feet. Von Neumann J (1945) A model of general economic equilibrium.Many students and adults think a business can set whatever prices it wants. Ten Raa T, Shestalova V (2015) Supply-use framework for international environmental policy analysis. Ten Raa T (2011) Benchmarking and industry performance. Ten Raa T (2008) Debreu’s coefficient of resource utilization, the Solow residual, and TFP: the connection by Leontief preferences. Ten Raa T (1995) The substitution theorem. Solow RM (1957) Technical change and the aggregate production function. Sato K (1975) Production functions and aggregation. Sato K (1969) Micro and macro constant-elasticity-of-substitution production functions in a multifirm industry. In: ten Raa T (ed) Handbook of input–output analysis. The construction of input–output coefficients. Muysken J (1983) Transformed beta-capacity distributions of production units. Mirrlees JA (1969) The dynamic nonsubstitution theorem. Levhari D (1968) A note on Houthakker’s aggregate production function in a multifirm industry. Leontief WW (1936) Quantitative input and output relations in the economic system of the United States. Kop Jansen P, ten Raa T (1990) The choice of model in the construction of input–output coefficients matrices. Koopmans TC (1951) Activity analysis of production and allocation. Johansen L (1972) Production functions: an integration of micro and macro, short run and long run aspects. Johansen L (1972) Simple and general nonsubstitution theorems for input–output models. Houthakker HS (1955) The Pareto distribution and the Cobb-Douglas production function in activity analysis. Growiec J (2008) Production functions and distributions of unit factor productivities: uncovering the link. Econometrica 19(3):273–292ĭiewert WE, Fox KJ (2008) On the estimation of returns to scale, technical progress and monopolistic markups. J Prod Anal 12(1):5–20ĭebreu G (1951) The coefficient of resource utilization. Edward Elgar, Cheltenhamīlackorby C, Russell RR (1999) Aggregation of efficiency indices. The supply and use framework of national accounts. Prentice-Hall, New Yorkīeutel J (2017) Chapter 3. Baumol WJ (1961) Economic theory and operations analysis.
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