Monday, May 6, 2013

Microeconomics (2068Q3): How do prices of (i) goods and services, (ii) labour, (iii) capital, (iv) entrepreneurship, and (v) foreign exchange interact with each other? Inter-relate it.

The factors of production such as labour, capital and entrepreneurship resources are inputs to produce output goods and services. The changes on foreign exchange impacts to goods and services, labour, capital and entrepreneurship resources too.

i. Goods and services:

Goods and services are the output of production of any firm. The ideal combination of inputs like as land (fixed input) and variable inputs (labour, capital, entrepreneurship) can product optimum output. So, the efficient production of goods and services are highly dependent of factors of production.

If market prices rise, incentives are created for producers to supply more to the consumers. If prices fall, there are incentives to produce less. Similarly, with consumers, high prices create incentives to buy less, while low prices create incentives to buy more.

ii. Labour:

It is one of an important production factor. Skillful labour are needed to maximize the production. The skills, knowledge and talents of people can be improved or made more productive through education and training. Labour is directed proportional to output as well as cost of production. So, optimum number of labours should used for production.

iii. Capital:

Capital consists of tools, equipment, machines and buildings that producers use to produce something else. High capital leads high production and less need of labours.

iv. Entrepreneurship:

Well combination of entrepreneurship in business improve in high production in low cost.

v. Foreign exchange:

Besides among factor, foreign exchange also impacts on cost of output and production cost of any goods and services. If native currency is cheaper then cost of production will low and vice versa. Hence if cost of production is lower, then market price of goods and services will also low that means the goods can compete in the global market.

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