p_eval04_l8_pric

p_eval04_l8_pric - 1.011 Project Evaluation Prices &...

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1.011 Project Evaluation Prices & Inflation Carl D. Martland 1. Review of prices 2. Price indices 3. Real vs. nominal discount rates
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Review of Prices Prices are determined by the interaction of supply and demand Demand issues: Willingness-to-pay depends upon the VALUE of the service or product, not its COST The lower the price, the greater the demand Supply issues Min price > marginal cost (or supplier won't produce) Avg price > avg cost (or supplier won't make a profit) Choose design, production process, machines, materials for expected volume/demand and desired level of service
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Lower Costs Allow Lower Prices Choice of process depends upon the relative prices of inputs Input substitution Average and marginal costs vary with the size of the project Economies of Scale Technological change allows lower costs through introduction of new machines, materials, processes, designs, etc Technological change
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Minimum Cost Combination of Inputs to Produce Q0 is Where Isocost Curve is Tangent to Isoquant for Qo Q0 Q1 Production Isoquants Capital Labor Isocost = Cc*Capital + Cl*Labor Optimal
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Input Substitution: As Prices of Inputs Change, Different Processes or Materials are Used Q0 Q1 Production Isoquants Capital Labor Isocost = Cc2*Capital + Cl2*Labor New Optimal
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p_eval04_l8_pric - 1.011 Project Evaluation Prices &...

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