The Fundamental Question of Economics
What to produce
How to produce it/How much
to produce.
For whom would you produce
Resource Allocation via the Price Mechanism
Product Market
Consumers
Producers
Seeks to maximize satisfaction for given income
Maximize satisfaction
and willing to pay
higher prices for g/s
Seeks to maximize profits
Will produce g/s that command
high prices to max profit
What to produce
How to produce
How much to produce
Allocation of resources in
response to prices takes
place here.
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Will use the cheapest
means to produce to
maximize profit
For whom to produce
Resource Allocation via the Price Mechanism
Consumers
increase DD
for Chery
QQs
Producers
want to
produce
more QQs
Shortage of
QQ
Price of QQ
increase
Increase dd
for resources
to build QQs
Increase in
price of
resources to
build more
QQ
Signal to
firms to
produces
more QQ
Attract more
resources
into this car
industry
Back to overall
price mechanism