In economics, the term «price» denotes the consideration in cash (or in kind) for the transfer of something valuable, such as goods, services, currencies, securities, the use of money or property for a limited period of time, etc.
2. How is the price normally restricted in commercial practice?In commercial practice, price is normally restricted to the amount of money payable for goods, services, and securities.
3. What is interest rate?Interest rate is the price for temporary use of somebody else’s money.
4. What is exchange rate?Exchange rate is the price of one currency in terms of another.
5. What may the price refer to?Price may refer either to one unit of a commodity (unit price) or to the amount of money payable for a specified number of units or for something where units are not applicable.
6. What two important functions do prices perform?Prices perform two important economic functions: they ration scarce resources, and they motivate production.
7. What can you say about the rationing effect of prices?Since there is not enough of everything to go around, in a market system goods and services are allocated, or distributed, based on their price and economists describe that as the rationing effect of prices.
8. What do you know about the production-motivating function of prices?As prices rise, the increase serves to attract additional producers. Similarly, price decreases drive producers out of the market. In this way prices encourage producers to increase or decrease their level of output. Economists refer to this as the production-motivating function of prices.
9. May prices be free to respond to changes in supply and demand?Yes, prices may be either free to respond to changes in supply and demand or controlled by the government or some other (usually large) organisation.
Business people think of demand as the consumption of goods and services. At the same time, they think of supply as their production. As they see it, supply means the quantity of a product supplied at the price prevailed at the time. Economists areconcerned with market as a whole. They want to know how much of a certain product sellers will supply at each and every possible market price. Everyone who offers an economic product for sale is a supplier.
The law of supply states that the quantity of an economic product offered for sale varies directly with its price. If prices are high suppliers will offer greater quantities for sale. If prices are low, they will offer smaller quantities for sale. Since productivity affects both cost and supply it is important that care can be taken in selecting the proper materials. Productivity and cost must be kept in mind in order to make the best decision. It means a business must analyse the issue of costs before making its decisions. To make the decision-making process easier we try to divide cost into several different categories.
Fixed cost — the cost that a business incurs even if the plant is idle and output is zero. It makes no difference whether the business produces nothing, very little, or a lot.
Fixed costs include salaries paid to executives, interest charges on bonds, rent payments on leased properties, local and state property taxes. They also take in depreciation ¾ the gradual wear and tear on capital goods over time.
Variable cost — a cost that changes with changes in the business rate of operation or output.
Total cost — is the sum of the fixed and variable costs. It takes in all the costs a business faces in the course of its operations.
Marginal cost — the extra or additional cost incurred when a business produces one additional unit of a commodity. Since fixed costs do not change, marginal cost is the increase in variable costs, which stems from using additional factors of production.