BUSINESS ECONOMICSClass 8

8 December, 2009

Recap

Capital Budgeting NPV, Internal Rate of Return Profitability Index, Payback period

Cost Curves Marginal Cost Curve Average Cost Curve Fixed and Variable Costs Short-run and Long-run Costs

Cost Curve

MC curve is above average cost or average variable cost curves, then curves are rising.

If MC is below average cost curve or average variable cost curve, then curves are falling.

If MC equals average cost, then average cost is at its minimum value.

If MC equals average variable cost, then average variable cost is at its minimum value.

Price Controls

Price controls are governmental impositions on the prices charged for goods and services in a free market.

Purpose of controls To maintain the affordability of staple

foods and goods To prevent price gouging during shortages To ensure an income for providers of

certain goods.

Price Controls

There are two primary forms of price control Price ceiling - the maximum price that can

be charged Price floor - the minimum price that can be

charged Techniques of price controls

As part of a larger income policy package Wage controls Other regulations

Price Controls

Criticism Prices kept artificially low Demand is increased to the point where supply can not keep up Shortages in the price-controlled product. Shortages lead to black markets where prices for the same good

exceed those of an uncontrolled market. Once controls are removed, prices will immediately be subject to

rampant inflation, which can temporarily shock the economic system.

Example of how price controls cause shortages Arab oil embargo between October 19, 1973 and March 17, 1974.

Long lines of cars and trucks quickly appeared at retail gas stations in the U.S. and some stations closed because of a shortage of fuel.

The fixed price was below what the market would otherwise bear and, as a result, the inventory disappeared.