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AEB 3331 - Agricultural Prices

AEB 3331 - Agricultural Prices - You can look at price from...

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You can look at price from its allocative mechanism of resources. Major Functions of Prices Fixed Standards of Value o Consumers want to maximize utility while producers want to maximize profit. o The price consumers are willing to pay reflect the satisfaction they derive from such good/services o On the basis of the apparent consumers’ desires, producers organize (or allocate) their resources to produce those products that will maximize their return o Thus the standard of value, as fixed by the price system, provide the information necessary for the organizational types of managerial decisions made by producers. How do prices Organize Production? o Remember the three (3) management models Factor-Product: Producers use the prices of input & outputs to determine the level of variable resource & the level of outputs to offer for sale MFC = MVP Factor-Factor: Managers utilize resource (or factor) prices to determine the least cost combination of resources to use in the production of given levels of output Product-Product: (Production Possibilities Curve): Substitute one product for the other up to the point where the marginal rate of product transformation is exactly equal to the inverse ration of product prices. o Distribute products (both geographically & among consumers). o Ration products (over time) o Provide for maintenance & growth in the economy Distinguishing Characteristics of Agricultural Prices 1. More volatile than prices of non-agricultural products
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