Question

CLASS DISCUSSION TOPIC – MAKING PRODUCTION DECISIONS

After our tour of demand, this week we learn about the foundations of the supply-side: costing. Let's start the discussion this week by thinking about the supply-side motivations for lowering prices as volume rises. What could account for that and how is it justified on the basis of MEc? Can you think of specific examples of it?

Answer #1

Marginal efficiency of capital is the rate of discount that would be equal to the price of a fixed capital asset. If the volume of production rises with the demand kept constant, then therell be excess production and in order to avoid wastage, the prices will get lowered as more as the purchase will then be more.

With MEc, one can get a fixed discount rate with which the prices get to lower a bit and also they can match the expected income at that discount rate when the volume or supply is high.

Example - Consider the expected income of a product is £80 and the MRP is £100. The production is high where the supply is high as well. So with the discount of 20% one can reach the expected income where the price falls to £80.

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